Consumer Confidence Improves, PPI Surges, and Markets Turn Risk-Off

This week’s economic data includes: (1) consumer confidence for February, (2) Producer Price Index (PPI) Index for January, and (3) weekly initial jobless and continuing claims.

KEY SUMMARY:

Consumer confidence improved modestly in February as expectations for jobs, income, and spending strengthened, but views on current conditions softened, labor signals remained mixed, confidence stayed below year‑ago levels, and consumers continued to balance easing recession fears with elevated inflation and more value‑focused spending plans.

Consumer confidence showed modest improvement in February, with the Conference Board’s Consumer Confidence Index rising 2.2 points to 91.2 and beating expectations. The gain was driven by a better outlook for future business conditions, jobs, and income growth—an encouraging signal for consumer spending heading into 2026. The Expectations Index also climbed, reflecting less pessimism about the economic outlook, modestly better labor market expectations, and slightly improved income prospects. Still, confidence remains well below last year’s levels, with the CCI down nearly nine points year over year and the Expectations Index stuck below the recession-warning threshold for the thirteenth straight month.

In contrast, views on current conditions weakened. The Present Situation Index fell to its lowest level since early 2021 as more consumers described business conditions as “bad,” even though it remained above expectations. Labor market perceptions were mixed: more respondents said jobs are plentiful, but a rising share also said jobs are hard to get, pushing that measure to a multi-year high and keeping markets cautious about labor momentum. Beneath the surface, confidence improved mainly among younger consumers, while older age groups and most income brackets softened. Inflation and interest rate expectations stayed elevated, recession concerns eased somewhat, and spending plans picked up for big-ticket items—especially used vehicles and select household goods—while service spending remained solid but slightly more value-focused.

January wholesale inflation data came in much hotter than expected, driven by persistent service-sector inflation and rising wholesale and retail margins, signaling continued cost pass-through to consumers and reinforcing expectations that the Federal Reserve is unlikely to cut interest rates in the near term.

January wholesale price data came in significantly hotter than expected, underscoring persistent inflation pressures at the wholesale level. The PPI rose 0.5% month over month, the largest increase since September and well above forecasts, driven primarily by higher service prices – especially trade services. While headline PPI eased slightly on a year-over-year basis to 2.9%, it remained above consensus expectations. Goods prices declined due to sharp drops in food and energy, including steep declines in eggs and liquified natural gas, but these were more than offset by rising prices for core goods such as communication equipment, industrial machinery, and precious metals.

Services inflation remained the dominant driver, with service prices rising 0.8% – the largest increase since July – reflecting higher wholesale and retail margins and continued cost pass-through to consumers. Core PPI (excluding food and energy) surged 0.8% on the month and accelerated to 3.6% year over year, far exceeding expectations, while super core PPI remained elevated despite a modest deceleration. Increases across key components feeding into core PCE inflation – including healthcare services, portfolio management, airline fares, and trade margins – point to upward pressure on the Fed’s preferred inflation gauge. Combined with strong labor market data, the January PPI report reinforces expectations that the Federal Reserve is unlikely to cut interest rates at its March 17–18 meeting.

The labor market conditions remained stable, with modestly higher initial jobless claims but declining continuing claims, an unemployment rate expected to hold at 4.3%, and data that—alongside elevated inflation—support the view that the Federal Reserve is unlikely to cut rates in the near term.

The labor market data continued to signal stability, with initial jobless claims rising modestly to 212,000 for the week ending February 21 but remaining below expectations and well under year-ago levels, while the four-week average edged only slightly higher. Continuing claims declined to 1.833 million, also coming in below forecasts and last year’s level, suggesting limited deterioration in labor conditions. Together with an expected February unemployment rate of 4.3%—in line with the Chicago Fed’s real-time estimate—and still-elevated inflation, the data reinforces expectations that the Federal Reserve is unlikely to cut interest rates in the near term.

Markets moved sharply risk-off as equities posted broad weekly losses—led by tech and banks—amid inflation surprises, AI-related economic concerns, private credit stress, and geopolitical tensions, while Treasury yields fell on a flight to safety. Rate-cut expectations remained centered in July and October 2026 with a possible additional cut pulled forward to April 2027.

Equity markets ended the week lower, led by the Dow Jones Industrial Average’s steepest decline in two years, while the S&P 500 and Nasdaq posted their fourth consecutive weekly losses. Market weakness was driven by hotter-than-expected wholesale inflation, rising concerns about AI-driven economic and labor disruption, mounting private credit stress, and heightened geopolitical tensions between the U.S. and Iran. Technology stocks sold off early in the week following a widely circulated Citrini Research scenario outlining a negative AI-driven feedback loop, with concerns reinforced by Block’s announcement of significant AI-related layoffs. Although Nvidia reported strong earnings, its shares declined amid questions about the sustainability and returns of massive AI capital spending. Credit concerns intensified later in the week after dividend cuts by two publicly traded private credit funds and the collapse of a U.K. financing firm, pressuring bank shares.

In fixed income markets, Treasury yields declined across most maturities as investors moved into safe-haven assets, with the 10-year yield falling below 4% for the first time in four months. Risk-off sentiment driven by AI-related economic concerns and geopolitical tensions outweighed the impact of elevated inflation data, resulting in a lower shift in the yield curve. The 2-year, 5-year, and 10-year yields ended the week at 3.38%, 3.51%, and 3.97%, respectively. Rate expectations were largely unchanged, with markets continuing to price in Federal Reserve rate cuts in July and October 2026, while expectations for a third cut shifted earlier to April 2027. If the two anticipated 2026 cuts are delivered, the federal funds rate’s upper bound would fall to 3.25% from the current 3.75%.

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DETAILED ANALYSIS:

Consumer Confidence – February Update:

The Conference Board reported that its Consumer Confidence Index (CCI) rose 2.2 points to 91.2 in February, following a January reading of 89.0 (revised up from 84.5) and surpassing market expectations of 87.1. The increase was driven primarily by improved consumer expectations for future business conditions, labor market prospects, and income growth—an encouraging signal for consumer spending in 2026. On a year-over-year basis, however, the CCI declined 8.9 points in February, following a larger 16.3-point drop in January.

Present Situation Index

The Present Situation Index, which measures consumers’ assessments of current business and labor market conditions, declined 1.8 points to 120.0, its lowest level since March 2021 but still above market expectations of 115.8. The decline reflected weaker sentiment toward current business conditions, with only a modest 0.1 percentage point increase in the share of respondents describing conditions as “good,” alongside a 1.7 percentage point rise in those labeling conditions as “bad.”

Labor market perceptions were mixed. The labor market differential improved to 7.4, driven by an increase in the share of consumers saying jobs are plentiful, rising to 28.0% from 25.8% in January. At the same time, the share saying jobs are hard to get edged up to 20.6% from 19.0%, the highest level since February 2021. This measure remains closely watched by markets as a key indicator of labor market momentum.

Expectations Index

The Expectations Index, which tracks consumers’ short-term outlook for income, business activity, and labor market conditions, increased 4.8 points to 72.0. Despite the improvement, the index remained below the recession signal threshold of 80 for the thirteenth consecutive month. Consumers became less pessimistic about future business conditions, while expectations for labor market conditions improved modestly, with more respondents anticipating increased job opportunities over the next six months. Income expectations also edged higher.

Demographics

On a six-month moving average basis, consumer confidence increased in February among respondents under age 35—particularly Gen Z—while confidence declined among those aged 35 and older and across most income groups. By political affiliation, confidence rebounded among Republicans and Independents following January’s decline, while Democrats reported lower confidence levels.

Inflation and Recession Sentiment

Inflation expectations over the next 12 months were largely unchanged but remained elevated, and consumers continued to expect interest rates to stay high. Most respondents still anticipated higher stock prices one year ahead, although the percentage holding this view declined slightly from the prior month. Overall recession concerns eased, with fewer consumers stating that a recession is “very likely” or that the U.S. economy is already in one. At the same time, the share of respondents viewing a recession as “not likely” increased, while those describing it as “somewhat likely” rose modestly.

Spending and Purchase Plans

Consumers’ plans to purchase big-ticket items increased in February, with a higher share responding “yes” or “maybe,” led by used vehicles, furniture, televisions, and smartphones. Auto buying intentions continued to improve on a six-month basis, with a strong preference for used vehicles, while new car purchase plans were flat. Home-buying expectations drifted lower over six months but remained above year-ago levels.

Plans to purchase furniture and select appliances edged higher, smartphone demand continued to trend upward, and most other electronics categories were stable. Planned spending on services softened slightly but remained healthy, reflecting a continued shift toward lower-cost and essential services. Dining out remained the top services category, while vacation plans declined modestly.

PPI – January Update: 

The Bureau of Labor Statistics (BLS) reported that the Producer Price Index (PPI) rose 0.5% month over month in January, following a 0.4% increase in December (revised down from 0.5%). The gain—driven largely by higher service prices, particularly trade services—exceeded market expectations for a 0.3% increase and marked the highest monthly reading since September. On a year-over-year basis, PPI increased 2.9%, down slightly from 3.0% in December but above the consensus forecast of 2.6%.

Goods Prices

Prices for goods, including food and energy, declined 0.3% in January after a 0.1% decrease in December, representing the largest monthly decline since a 0.7% drop in March 2025. The January decline was primarily driven by lower food and energy prices, partially offset by rising core goods prices (excluding food and energy). Energy prices fell 2.7% following a 1.5% decline in December, led by an 18.6% drop in liquified natural gas. Food prices declined 1.5% after a 0.2% decrease in December, driven by sharp declines in eggs (-63.9% month over month; -87.0% year over year) and fresh fruits and melons (-10.5% month over month; -11.9% year over year).

In contrast, core goods prices rose 0.7% after a 0.4% increase in December, with notable gains in communication and related equipment (+8.6% month over month; +13.5% year over year), metal-cutting machine tools (+5.6% month over month; +7.3% year over year), and jewelry, platinum, and karat gold (+6.3% month over month; +29.7% year over year).

Services Prices: 

Service prices increased 0.8% in January, up from 0.7% in December and the highest monthly increase since July. The advance was driven by a 2.5% rise in trade service margins, which accounted for roughly one-quarter of the overall 0.5% monthly PPI increase. Trade services measure changes in margins received by wholesalers and retailers. The largest contributors included margins for professional and commercial equipment wholesaling (+14.4% month over month; +7.6% year over year), apparel, jewelry, footwear, and accessories retailing (+8.8% month over month; +16.6% year over year), chemicals and allied products wholesaling (+8.4% month over month; +8.0% year over year), and health, beauty, and optical goods retailing (+3.2% month over month; +0.5% year over year), suggesting continued pass-through of higher costs to customers.

Transportation and warehousing services rose 1.0%, led by airline passenger services (+2.6% month over month; +3.8% year over year) and truck transportation of freight (+0.7% month over month; +2.0% year over year). Service prices excluding trade, transportation, and warehousing were unchanged overall, though several categories posted notable gains, including bundled wired telecommunications access services (+5.8%), passenger car rental (+7.6%), arrangement of flights (+4.3%), dental care (+2.2%), portfolio management (+1.5%), and physician care (+0.8%).

Core & Super Core PPI

Excluding food and energy, core PPI rose 0.8% month over month in January, following a 0.6% increase in December (revised down from 0.7%) and well above expectations for a 0.3% gain. On a year-over-year basis, core PPI increased 3.6%, up from 3.3% in December and exceeding the expected 3.0%.

The “super core” PPI, which excludes food, energy, and trade services, rose 0.3% month over month, unchanged from the prior month (revised down from 0.4%) and in line with market expectations. Year over year, super core PPI increased 3.4%, down slightly from 3.5% in December and below expectations of 3.5%.

Markets continue to closely monitor the seven PPI components that feed into the core PCE Price Index, the Federal Reserve’s preferred inflation gauge. January showed increases across most healthcare services, portfolio management, airline fares, and wholesale and retail margins, suggesting upward pressure on January core PCE inflation.

Overall, January’s PPI data came in significantly hotter than expected, reflecting businesses’ ability to pass through higher costs. Combined with expectations for elevated core PCE inflation and recent strong job gains, the data reinforce the view that the Federal Reserve is unlikely to cut interest rates at its March 17–18 meeting.

Jobless Claims – Week Ending February 21:

The Labor Department reported that initial jobless claims increased by 4,000 to 212,000 for the week ending February 21, compared with a revised 208,000 in the prior week and below market expectations of 216,000. Claims also remained well below the 243,000-level recorded during the same week last year. The four-week moving average edged up modestly to 220,250, from a revised 219,500 the previous week, indicating continued stability in the labor market. This stability is consistent with an expected February unemployment rate of 4.3%, which aligns with the Chicago Fed’s Real-Time Unemployment Rate Forecast for the month. Taken together with still-elevated inflation, these data reinforce the view that the Federal Reserve is unlikely to reduce interest rates in the near term.

Continuing claims, which measure the number of individuals receiving unemployment benefits, declined by 31,000 to 1.833 million for the week ending February 14, coming in below expectations of 1.858 million. Continuing claims were also lower than the 1.847 million reported in the same week last year. The four-week moving average of continuing claims increased slightly to 1.848 million, up from 1.844 million in the prior week.

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MARKET ANALYSIS:

Equity Market Weekly Recap

Equity markets finished the week lower, with the Dow Jones Industrial Average posting its steepest decline in two years. The S&P 500 and Nasdaq also ended the week in negative territory, marking their fourth consecutive weekly decline. Losses were driven primarily by hotter-than-expected wholesale inflation data, rising concerns around AI-related disruption, mounting private credit risks, and escalating geopolitical tensions between the U.S. and Iran.

The week began with sharp declines in software and technology stocks, largely triggered by a viral “doomsday” report from Citrini Research. The report outlined a hypothetical scenario set in June 2028 (not a forecast) in which rapid improvements and declining costs in AI lead companies to lay off workers, redirect savings into additional AI capabilities, and further displace labor. Reduced consumer spending by displaced workers would then weaken demand for goods and services, prompting companies to invest even more heavily in AI to protect margins—creating a self-reinforcing negative feedback loop with no natural brake.

Concerns over AI’s economic and labor market impact were further amplified by payments company Block’s decision to lay off approximately 40% of its workforce, citing advancements in AI. Although Nvidia delivered another strong earnings report midweek, its shares declined afterward amid growing investor concerns over sustainability and ultimate return on massive AI-related capital expenditures.

Later in the week, credit-related worries intensified after two publicly traded private credit funds announced dividend cuts, and the collapse of U.K.-based financing firm Market Financial Solutions added to broader unease. These developments weighed heavily on bank shares, contributing to further market weakness.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: -0.95% (weekly) & -2.47% (YTD), closing at 22,668
• S&P 500: -0.44% (weekly) & +0.49% (YTD), ending at 6,879
• Dow Jones Industrial Average: -1.31% (weekly) & +1.90% (YTD), closing at 48,978
• Russell 2000: -1.18% (weekly) & +6.06% (YTD), ending at 2,632

Treasury Market Update

Treasury yields declined across most maturities during the week, with the largest moves occurring in the 2-year tenor and beyond. The 10-year Treasury yield fell below 4% – its lowest level in four months. The decline was driven primarily by a pronounced “flight to safety,” as investors responded to growing concerns over AI-related economic and labor market disruption, as well as heightened geopolitical tensions between the U.S. and Iran.

These risk-off dynamics outweighed the impact of hotter-than-expected inflation data, as market participants prioritized the relative safety of U.S. Treasuries over inflation risks. As a result, the yield curve shifted lower compared to the prior week.

Key Treasury Yield Movements:

• 2-year yield: 3.38% (-0.10%)
• 5-year yield: 3.51% (-0.14%)
• 10-year yield: 3.97% (-0.11%)

Rate Cut Expectations

As in the prior week, markets continue to price in interest rate cuts in July and October 2026. However, expectations for an additional cut have shifted. Whereas markets last week anticipated a third rate cut toward the end of 2027, expectations have now moved that potential cut forward to April 2027.

If the two cuts currently anticipated in 2026 are implemented, the federal funds rate’s upper bound would decline to 3.25%, down from the current 3.75%.

*******************************************************************************************************NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 3/2 (Monday):
  • ISM Manufacturing (February)
• 3/4 (Wednesday)
  • ISM Services (February)
• 3/5 (Thursday)
  • Weekly Initial and Continuing Jobless Claims
• 3/6 (Friday)
  • Retail Sales (January)
  • Employment Situation (February)

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For a visual representation of this week’s economic review, you can view or download the slide deck here: 03.02.2026 CBC Weekly Economic Update Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough

EVP of Commercial Bank of California

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