"There Is No Trend"
In the short term, “There Is No Trend” to this market activity. (Since we enjoy a good acronym, we’re calling this TINT.)When markets are TINTed, there is significant action driven by large-levered hedge funds, algorithmic trading platforms and other trade-oriented individuals, among other players. These participants trade in volumes that exacerbate the ongoing market moves.
As a long-term investor, this can create some opportunity to add to risk assets, but the main takeaway is to stay the course and not get caught up in the day-to-day market swings.
This market is likely to remain TINTed for at least the next few trading sessions given its current sensitivity to headlines. We have mentioned numerous times this past week how news from the White House could have a significant impact on markets. Exhibit A, the rumor on Monday then the official news on Wednesday of the 90-day delay.
This 90-day delay helps with some uncertainty in the short term, but it doesn’t fully clear a path forward just yet. Progress on the trading relationship with China could be the next headline to violently rally markets.
For now, caution is warranted while the market is TINTed, but long-term investors should actively monitor for opportunities that make sense given their long-term asset allocation goals. This has been, and will continue to be, the focus within our portfolios as this dislocation continues to play out.
March CPI Surprise
We received updated CPI figures on Thursday morning. After rising 0.2% in February, the Consumer Price Index fell 0.1% in March. Given the tariff developments of the last week, this March CPI number carries little weight. Inflation data does remain a key input to any interest rate decision from the Fed. As we stand today, all countries that were originally subject to reciprocal tariffs, excluding China, are being given a 90-day grace period to negotiate better terms. The minimum 10% tariff, however, has gone into effect.How importers deal with this 10% tariff will vary based on the product. Lower margin goods, like food, will likely see an immediate cost passed through to consumers. Higher margin goods, like electronics, may not see similar, immediate increases. Importers may decide that they would rather their profits take a hit than raise their prices.
Either way, we should expect inflation to increase in the coming months to reflect the new tariffs. In the short run, inflation expectations have risen. The Fed will be closely monitoring long-run inflation expectations. If expectations remain well contained, then the market is buying the thesis that these tariffs should lead to one-time increases in inflation instead of sustained pressure on inflation. This would likely give the Fed more confidence to cut interest rates sooner. The tariffs will also negatively impact growth, which would be a positive in the fight against inflation.
Other interesting data worth tracking from this CPI report is improvement in the “stickier” components of inflation. The chart below shows the CPI index (navy line) against the CPI index less food/energy (light blue line), which represents the stickier components.
Throughout the rise of inflation from 2021-2022, we can see that CPI excluding food and energy was slower to adjust upwards. The same has been true since inflation has come down—the red line has been slower to fall.
Shelter, a large input in the CPI overall, is a good example of this phenomenon. Rental rates tend to be slow to adjust because they are typically locked into at least 12-month leases.
The continued slow decline of these sticky items is a good sign for the battle against inflation, and there are some powerful trends that should continue to lead to moderation in these items. The Fed will be watching this line closely over the next few months as another key input into its decision around interest rates.
