Running Hot

Weekly Newsletter: February 17, 2025

Contrary to the recent weather spell through much of the Upper Midwest and Eastern states, it has been “all around me feeling hot, hot, hot.” The reference is not the weather, but the inflation data released this past week. No matter how you twisted, turned, or tossed it, inflation is getting further away from the Fed’s target, rather than closer. The poster child has been eggs, up only 15% in the past month, but even looking at the core (eliminating food/energy) or median inflation, the numbers are up. One potential result of higher inflation is that consumers spend a bit less. In line with consumer confidence falling a bit, retail sales fell by nearly 1%. The colder weather was to blame (it is always about the weather for retailers!) for a portion as well as a post-Christmas pullback. Taking all of the reports together indicates that inflation is indeed having an impact on spending. Inflation too, does not look to be cooling anytime soon, as commodity prices continue to rise, now sitting at their highest level in nine months. Rumblings of higher interest rates later this year are getting a bit louder.

Taking a look back at the week and comparing the results of the economic data with the estimates, it would not be a surprise to see markets much lower. Inflation, as measured by both the consumer and producer prices indices showed an acceleration in inflation. Retail sales usually declined following Christmas (what else can be bought??!), but they did by a larger-thanexpected amount. A glimmer of good news is that restaurants/bars saw gains, indicating consumers are willing to spend on themselves. The combination of lower retail sales and higher inflation means that consumers are spending more for less. The expectation would be that economic growth will slow in the future, were these trends to continue. The key for the consumer continues to be employment. Even with the large adjustments over the past year, employment growth has been “good enough” to keep the unemployment rate near historical lows. Tariffs, trade, and immigration will continue to buffet the markets and maybe the economic data in the months ahead. But for now, investors are singing a happy tune.

It would not be surprising if the hot CPI print cooled the desire to buy/hold bonds and push interest rates higher. Following the inflation reports, yields did increase, however merely temporarily. Once the data came out on the poor retail sales, bonds rallied on the belief that the Fed would be more inclined to cut rates than hike later in the year. The focus for investors should remain on the inflation data, which is still too high for the Fed’s (and consumer’s) liking. One insight into the direction of prices would be general commodity prices. Yes, eggs, but too oil, steel, copper, and agricultural goods. The large basket of commodity prices has been rising for the past few months and shows few signs of slowing down.

The surprising rally in the market last week was led by large growth, as most of the rest of the market was only slightly positive. The rotation back towards large growth may cut the excitement over a broadening out of the market rally that showed up in January. Technology in general has been the tail that wags the SP500 dog. In what has been a bit of a Texas two-step, tech has rallied for two months, takes one off, rallies again for two, and rests for one. Beginning a year ago, if this pattern continues, March should be another good technology month! Of course, there is no financial reason for the pattern, but it does highlight how the tech sector can push markets around, given their outsized weight compared to the rest of the market.

The focus on inflation and the consumer is likely to be the key focus for markets in the months ahead. In a holiday-shortened week, this week will be loaded with Fed speakers and little marketmoving data. The focus may, therefore, shift to more geopolitical news for the week.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.