Market Caught Between Inflation Relief and Recession Fears

Weekly Economic Review: March 14, 2025

Despite benign inflation data, recession fears and tariff threats are driving the market. The week’s focus will be on the Fed’s meeting, press conference, and economic projections

Last week, the stock market experienced volatility, with the S&P 500 briefly dipping into correction territory, down 10.1% from its recent highs. This was primarily due to concerns over the possibility of an economic downturn and uncertainty about how tariffs would impact inflation. Recession fears and tariff threats led investors to stay on the sidelines. The ongoing back-and-forth on tariff policies has made it challenging for businesses and consumers to plan.

In January, job openings increased, layoffs decreased, and quits rose, all indications of a resilient labor market. However, labor demand for February is expected to weaken, lagging the jobs report that showed a slowdown in the labor market last month, when the unemployment rate rose to 4.1% and the number of workers holding part-time jobs and multiple jobs spiked.

After hotter-than-expected consumer prices in January, both headline and core CPI inflation numbers for February increased only moderately, coming in lower than both the market’s expectation and the previous month. The monthly headline CPI number posted its smallest gain since October. Gasoline prices fell due to lower demand for oil, while food prices rose, with egg prices trending higher. Similarly, both monthly and annual headline PPI came in lower than market expectations and the prior month’s levels.

Consumer confidence declined and inflation expectations rose in the latest survey.

Let’s review the Job Openings and Labor Turnover Survey (JOLTS), the Consumer Price Index (CPI), the Producer Price Index (PPI), and consumer confidence in more detail.

JOLTS: The Bureau of Labor Statistics (BLS) announced that the number of job openings increased by 232,000 in January, to 7.74 million from a downwardly revised 7.51 million (originally 7.60 million) in December. This was higher than the market expectation of 7.60 million.  On an annual basis, job openings were down by 728,000 from a year ago. The monthly increase was mainly driven by gains in retail trade (143,000), finance and insurance (77,000), real estate and rental and leasing (46,000), construction (31,000) and manufacturing (31,000), partially offset by a loss in professional and business services (122,000).  Regionally, all four regions posted gains.

The ratio of openings to unemployed people remained unchanged at 1.1. The number of hires increased by 19,000 to 5.39 million in January from 5.37 million in December. The increase in January hires was mainly driven by a gain in professional and business services (36,000), manufacturing (32,000) and construction (26,000), mostly offset by accommodation and food services (67,000), and transportation, warehousing and utilities (31,000). On an annual basis, hires declined by 179,000 from a year ago. The Northeast and South posted gains, while the Midwest and West posted losses in hires for January.

Layoffs decreased slightly, by 34,000 to 1.64 million after declining 70,000 to 1.67 million (revised down from 1.77 million) in December, which came in lower than the market expectation of 1.81 million. Layoffs were down by 57,000 over the year. The monthly decrease in layoffs was mainly driven by decreases in transportation, warehousing and utilities (41,000) and leisure and hospitality (33,000). The Northeast and South posted losses, while the Midwest and West posted gains in layoffs.

The number of people who voluntarily resigned increased by 171,000 to 3.27 million in January after increasing by 63,000 in December to 3.09 million (revised down from 3.19 million). The January figure came in higher than the market expectation of 3.17 million. On an annual basis, it declined by 87,000 over the year. The quits rate, the rate at which workers voluntarily leave their jobs, excluding retirements, rose to 2.1% from 1.9% (revised down from 2.0%) in December.

CPI: The Bureau of Labor Statistics (BLS) released both headline and core CPIs for February. Consumer prices increased by 0.2% in February after a 0.5% rise in January. The monthly increase was primarily driven by a 0.3% rise in shelter costs, which account for nearly 40% of the monthly increase.  Food and energy costs also increased, but were partially offset by a 4% decline in airline fares. On an annual basis, the CPI increased by 2.8% in February, down from a 3.0% annual increase in January. Shelter costs increased by 4.2% over the year.

Food prices increased by 0.2% month-over-month after a 0.4% rise in January. The price for eggs jumped by 10.4%. On an annual basis, food prices rose by 2.6% in February, with the price of food at home (grocery store prices) rising 1.9% and food away from home prices increasing 3.7%. The increase in food at home prices was mainly driven by a 58.8% surge in the price for eggs. Energy prices rose by 0.2% over the month, after advancing 1.1% in January. Year-over-year, energy prices decreased by 0.2% after a 1.0% increase in the preceding month.

Excluding food and energy costs, the core CPI rose by 0.2% month-over-month in February, down from 0.4% from January. The February increase was driven by medical care, used vehicles, and apparel, partially offset by declines in airline fares and new vehicles. On an annual basis, the core CPI rose by 3.1%, lower than January’s 3.3% annual increase.

PPI: The BLS also announced the PPI, which was unchanged in February, down from 0.6% (revised higher from 0.4%) in January and lower than expected. On an annual basis, PPI increased by 3.2% after a 3.7% rise (revised higher from 3.5%) in the prior month. The annual figure also came in lower than the market expectation of 3.3%.

Prices of services in February fell 0.2% after a 0.6% increase in January, the largest decline since July 2024. This was mainly driven by decreases in the prices for machinery and vehicle wholesaling, food and alcohol retailing, automobiles and automobile parts retailing, apparel, and footwear and accessories retailing. In February, prices for goods rose by 0.3% after a 0.6% increase in January, the fifth consecutive rise.  This increase was mainly driven by a significant 1.7% rise in food prices which advanced by 1.0% in the prior month. Two-thirds of the February increase resulted from a 53.6% increase in egg prices.

Excluding food and energy costs, the core PPI fell 0.1% after a 0.5% increase in January, and came in lower than the 0.3% expectation. Year-over-year, the core PPI increased by 3.4%, lower than the market expectation of 3.5% and down from 3.8% (revised higher from 3.6%) in January.

The “super core” PPI, a less-volatile measure favored by many economists that excludes food, energy, and trade, rose by 0.2%, lower than the prior month’s 0.3%. The February reading also came in lower than the market expectation of 0.3%. On an annual basis, the super core PPI advanced by 3.3% in February, lower than the market expectation and prior month reading of 3.4%.

Consumer confidence.  Consumer confidence has dropped to its lowest level in over two years, while long-term inflation expectations have surged to their highest point since 1993, according to the preliminary University of Michigan Survey of Consumers. This significant rise in inflation expectations could potentially lead to actual inflation increasing, as both consumers and businesses adjust their behaviors accordingly.

In conclusion, inflation remains above the Fed’s 2% target, and the combination of rising long-term inflation expectations and tariffs is likely to drive prices higher and slow economic growth. Although last month’s consumer and producer inflation figures were soft, the personal consumption expenditure price index (the Fed’s preferred inflation measure) is expected to remain unchanged when announced later this month.  Given these challenges, the Fed is anticipated to keep interest rates steady on Wednesday, with markets closely monitoring the Federal Reserve’s policy and economic projections this week.

A week ago, the market predicted three solid 0.25% rate cuts. Now, it forecasts a 100% chance of two 0.25% rate cuts in 2025, totaling 0.5%, with a possibility of an additional 0.25% cut. The first 0.25% rate cut is expected at the June FOMC meeting, followed by a second in September. The third cut in December has a 50/50 chance. The two, five, and ten-year Treasury yields ended at 4.02%, 4.09%, and 4.31%, respectively, almost unchanged compared to their levels a week ago.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

_______________________________________________________________________

All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.