Treasury yields rose, stock markets fell, and the US dollar weakened. Oil prices edged up, gold hit a record, while Bitcoin and energy stocks gained.

Long-term Treasury yields rose, while short-term bond yields fell. The gap between US and German 10-year yields has shrunk to its smallest since July 2023, as German yields surged sharply following the announcement of a defence and infrastructure spending deal.

Stock markets experienced significant declines, with small- and micro-cap stocks dropping 1.50% and 0.90%, respectively outperforming large-cap stocks, which fell by over 2.20%. The "Magnificent 7" slumped 2.44%, playing a key role in the downturns of the S&P 500 and Nasdaq. All sectors finished the week in negative territory, except utilities and energy, the latter rising more than 2.50%.

The US dollar weakened by 0.35% against the euro. Crude oil (WTI) prices inched up 0.21%, supported by new US sanctions on Iranian oil and Hong Kong-flagged vessels tied to Iran's shadow fleet. However, oil demand faces pressure amid escalating global trade tensions, after Trump's threat of a 200% tariff on European wines and champagne. Meanwhile, gold soared 2.60%, hitting a new record of $3,000 per ounce, as investors flocked to the metal in response to rising concerns over a potential global trade war. Bitcoin gained 1.69%.

U.S. inflation moderated in February, but tariff concerns and rising business prices may delay rate cuts. Consumer sentiment dropped 11%, with worsening economic expectations and rising inflation concerns.

U.S. inflation moderated in February, with both headline and core consumer price indices rising by 0.2% MoM, below the expected 0.3%. This brought annual inflation rates to 2.8% for headline CPI and 3.1% for core CPI, marking the first decline since July 2024. The decrease was driven by lower airfares, new car prices, and gasoline costs, but other categories, such as services and used vehicle prices, remained elevated. However, growing concerns over tariffs are prompting businesses to pre-emptively raise prices. The Fed’s Beige Book highlighted ongoing inflation risks, with core inflation remaining above the 0.17% trend needed for a 2% YoY target, delaying potential rate cuts. Meanwhile, consumer sentiment dropped 11% in March and has fallen 22% since December 2024. This marks the third consecutive month of decline, driven by worsening expectations about personal finances, the labour market, inflation, and business conditions. Inflation expectations surged, particularly among Democrats and Independents, with the heightened uncertainty surrounding economic policies contributing to consumer pessimism.

US inflation cooled in February, but tariff concerns and rising business prices could delay Fed rate cuts, while falling housing costs may ease inflation pressures later in 2026.

U.S. inflation moderated in February, with both headline and core consumer price indices increasing by just 0.2% MoM, below the consensus expectation of 0.3%. This brought the annual inflation rates to 2.8% for headline CPI and 3.1% for core CPI, marking the first decline in both metrics since July 2024. The decrease was largely driven by a 4% drop in airfares, a 0.1% decline in new car prices, and a 1% reduction in gasoline prices. However, other categories remained elevated, including services excluding energy, which rose 0.3% MoM and 4.1% YoY, apparel (up 0.6%), and used vehicle prices (up 0.9%).

Despite the overall cooling, concerns over tariffs are growing. Businesses are reportedly pre-emptively increasing prices in anticipation of potential cost hikes, as indicated by a 10-point jump in the proportion of companies raising prices in the NFIB survey. The Fed's Beige Book also highlighted ongoing inflationary risks. Core inflation, at 0.227% MoM, remains above the 0.17% trend needed to reach the Fed’s 2% YoY target, suggesting that a reversal of this trend could delay any potential rate cuts until at least September. However, the Cleveland Fed has identified declining new tenant rents, which could signal a deceleration in housing inflation—accounting for over 40% of the core CPI basket. This could mitigate tariff-driven price pressures, potentially increasing the likelihood of more aggressive rate cuts by the Fed in early 2026.

We anticipate that inflation could rebound if former President Trump raises U.S. tariffs and expands them to additional countries. Such actions could push inflation above the target for a longer period than previously expected. As a result, we do not foresee any rate cuts in the first half of this year.

Consumer sentiment dropped 11% in March, down 22% since December 2024. Inflation expectations surged, with significant declines across political groups and worsening future economic outlooks.

Consumer sentiment has dropped by an additional 11% this month, with declines observed across all demographic groups, including age, education, income, wealth, political affiliations, and geographic regions. This marks the third consecutive month of decline, bringing sentiment down 22% since December 2024. While current economic conditions have remained relatively stable, future expectations have worsened in key areas, including personal finances, labour markets, inflation, business conditions, and the stock market. The heightened uncertainty surrounding economic policies has significantly contributed to this decline, making long-term planning difficult for consumers, regardless of their political preferences. All political groups have noted a weakening outlook since February, with Republicans seeing a 10% drop in their expectations index despite initial post-election optimism, while Independents and Democrats experienced even steeper declines of 12% and 24%, respectively. Year-ahead inflation expectations have surged from 4.3% to 4.9%, the highest level since November 2022, continuing a trend of substantial increases over the past three months. Year-ahead inflation expectations by party are as follows: Democrats +6.5%, Independents +4.4%, and Republicans +0.1%. Long-term inflation expectations also rose sharply from 3.5% in February to 3.9% in March, marking the largest month-over-month jump since 1993, primarily driven by a significant increase among Independents, following a similarly large rise in February.

This data aligns with our previous comments, showing that inflation remains high and could rise further due to tariffs that Trump is imposing and threatening to impose.