Last week’s economic data was plagued by uncertainty. A brief respite in inflation pressures was overshadowed by deepening anxieties among consumers and small businesses who are feeling unsure about what’s ahead. Consumer and producer prices offered a welcome sign of cooling inflation, yet lingering concerns about future policy impacts tempered any sense of relief. Meanwhile, consumer sentiment plunged to a multiyear low and small business optimism moderated as labor and inflation concerns intensified. Adding to the unease, the stock market experienced another week filled with volatility, briefly dipping into correction territory as investors grappled with these conflicting signals.
Consumer Price Index
Inflation cooled for the first time in five months in February. This relief may be short-lived, however, as the effects of tariffs have not yet been factored in and may contribute to price increases in the coming months. The Consumer Price Index (CPI) rose 2.8% last month, down from 3.0% in January and lower than the expected 2.9% growth. On a monthly basis, prices rose 0.2% after a 0.5% jump in January. The rise was driven by higher costs for shelter, energy, and food, which were offset by declines in airline fares, new vehicles, and gasoline.
Core inflation, which is more closely watched since it excludes volatile items like food and energy, fell to 3.1% last month, its lowest level since 2021. Core prices were up 0.2% from the previous month following a 0.4% increase in January. Both readings were lower than expected.
While the latest data offered some relief from price pressure, the Fed will most likely continue with its cautious approach to evaluate potential impacts that tariffs and other policies may have.
Job Openings and Labor Turnover (JOLTS)
Job openings increased in January, signaling some positive movement in an uncertain labor market. The JOLTS report for January indicated a rise in job openings by 232,000 to 7.740 million, surpassing the predicted 7.650 million. Although openings are still higher than they were before the pandemic, they have decreased over the past 2.5 years and are currently nearly 4.5 million below their 2022 peak.
The report also showed that hires and layoffs remained mostly unchanged, while quits increased. It is important to note that federal government job cuts by DOGE were not included in the data. The hiring rate stayed close to its lowest point in the past ten years at 3.4%. Quits, which indicate worker confidence, rose to 2.1%, the highest level since July, but still lower than pre-pandemic levels.
The ratio of job openings to unemployed workers was 1.1 in January, significantly lower than pre-pandemic levels. JOLTS data is a crucial indicator of labor demand, and a narrowing gap between job openings and available workers suggests that pressure on wages and inflation is easing. This recent data aligns with the Fed's perspective of a healthy and stable labor market. However, it is important to remember that the data has a two-month lag and does not reflect recent policy changes.
Michigan Consumer Sentiment
Consumer sentiment declined for the third straight month, as uncertainty fuels concerns. The Michigan Consumer Sentiment Index fell 6.8 points to 57.9 this month, its lowest level since November 2022. This represents a 10.5% decline from February’s final reading and a 27.1% drop from one year ago, the largest annual decline in nearly three years.
The current conditions index remained somewhat stable, only inching down a few points. However, the expectations index experienced its sharpest decline since 2021, falling to a 32-month low as consumers expressed significant uncertainty due to frequent policy changes, making long-term planning difficult.
Inflation expectations continued to rise for both the near and long term. Year ahead expectations rose for a fourth straight month to 4.9%, the highest level since November 2022, while five-year expectations jumped to 3.9%, the highest since 1993.
The Consumer Discretionary Select Sector SPDR ETF (XLY) is tied to consumer sentiment.
NFIB Small Business Survey
Optimism among small business owners moderated last month while uncertainty grew. The NFIB Small Business Optimism Index declined for the second consecutive month, falling 2.1 points to 100.7 in February — just below the 100.9 forecast. The index remains above its historical average for the fourth straight month. But uncertainty among small business owners spiked to its second highest level in history.
Small business owners cited labor quality and inflation as primary concerns. Many are implementing or planning price increases in the near term. Furthermore, there was a decline in the number of people who believe that now is a good time to expand and that business conditions will improve over the next six months. The survey results highlight the significant impact that the small business sector can have on the overall economy. Small businesses employ roughly 50% of the U.S. workforce.
Market Reactions
The S&P 500 finished off a volatile week with its best day of the year, gaining 2.1% last Friday. However, the index finished the week in the red for the fourth consecutive week. That's its longest losing streak in eight months. As a result, the SPDR S&P 500 ETF Trust (SPY) dropped 2.3% last week. Meanwhile, the S&P Equal Weight Index was down 2.3% from the previous week and the Invesco S&P 500 Equal Weight ETF (RSP) fell 2.3%.
The 10-year Treasury yield finished the week at 4.31%, while the 2-year note finished at 4.02%.
According to the CMEFedWatch tool, markets are currently pricing in three rate cuts in 2025. The anticipated cuts are now expected at the June, September, and December meetings.
Economic Data in the Week Ahead
This week's economic data will provide updates on consumer spending, housing, and regional manufacturing. On Monday, retail sales data for February will reveal if consumers recovered from January's steep decline. Housing indicators released throughout the week will show how higher mortgage rates and affordability challenges are shaping the real estate market. Additionally, the Empire State and Philadelphia Fed manufacturing surveys will highlight regional business conditions.
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