Wall Street no longer cares about inflation? Investors' attention shifts to trade conflicts

Once upon a time, inflation was the biggest concern on Wall Street. However, the consumer price index (CPI) for February, released on Wednesday, was below expectations, and the market's reaction indicated that investors had already shifted their attention to the escalating trade war and its potential impact on inflation and economic growth.

According to the Zhitong Finance APP, the CPI in the U.S. increased by 0.2% month-on-month in February, the slowest growth in four months, and lower than the widely predicted 0.3% by economists. More importantly, this data ended a series of higher-than-expected inflation readings since last November. Additionally, the inflation rate over the past 12 months fell from 3% to 2.8%, reversing the trend of rebounding from a low of 2.4% last autumn. The core CPI, excluding food and energy prices, increased by only 0.2% month-on-month, while the year-on-year growth rate dropped from 3.3% to 3.1%, the lowest level since April 2021.

This mild inflation data should have been good news for the market. However, investors did not seem excited. Stock index futures briefly rose after the data was released but quickly fell back to pre-release levels after the market opened. The movement in the U.S. Treasury market was even more noteworthy, with the 10-year Treasury yield briefly dropping in the initial reaction but then rebounding, rising about 4 basis points to 4.32% by midday.

Ian Lyngen, a rate strategist at BMO Capital Markets, noted in a report that the U.S. Treasury market had almost no reaction to this "mild" inflation data, and investors quickly shifted their focus to the re-inflation risks posed by the trade war. "This is the first time in this cycle that the market has completely ignored low inflation data and focused on other risks."

John Kerschner, head of U.S. securitized products at Janus Henderson, believes that the bond market's reaction may be more of an adjustment to the recent rise in bond prices. Since the end of February, the yield on the 10-year U.S. Treasury has fallen by about 20 basis points, and the market may be undergoing a correction.

Nevertheless, this inflation data still shows that the Federal Reserve has made some progress toward achieving its 2% inflation target.

As a result, the stock market briefly rebounded after the opening. Previously, the S&P 500 index had fallen nearly 10% since hitting a record high on February 19, approaching the technical correction zone, while the Nasdaq index had officially entered the correction zone. Technical analysts believe there is a certain demand for a rebound in the short term. However, this rebound was unstable in early trading, with the Dow Jones Industrial Average briefly rising by 288 points but then falling back into negative territory, down about 30 points by midday. The S&P 500 index rose by 0.7% in volatile trading, while the rebound in tech stocks pushed the Nasdaq index up by 1.5%. By the close, the three major indices showed mixed results, with the Dow down 0.2%, the Nasdaq up 1.22%, and the S&P 500 index up 0.49%.

Since February, the market has experienced significant fluctuations due to a series of trade war measures by President Trump. The Trump administration imposed high tariffs on major trading partners and repeatedly modified policies in a short period while threatening to implement more tariffs. Meanwhile, major economies around the world have also taken retaliatory measures, adding more uncertainty to future inflation data and exacerbating market concerns about economic slowdown Economists at Wells Fargo pointed out in a report: "Higher tariffs may push up spot inflation rates and inflation expectations in the coming months, but they will also put pressure on the labor market, which has already shown slight signs of weakness."

Additionally, even the inflation data for February itself reveals the underlying fragility of the economy. Kerschner from Janus Henderson noted that a 4% drop in airline ticket prices was one of the main factors for the CPI being lower than expected this time. Previously, several airlines, including Delta Air Lines (DAL.US), had warned of a recent decline in air travel demand and lowered their profit expectations. "This is just a signal that consumer spending is losing momentum."

As the market grapples with the complex reactions to inflation and the trade war, investors will have to face a more challenging economic environment. Even if inflation cools in the short term, in the long run, the trade war may bring greater inflationary pressures and economic downturn risks