Inflation Data Loom After Tariff-Related Sell-off
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Welcome to the Schwab Market Update podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead. I'm Colette O'Claire, and here is Schwab's early look at the markets for Friday, February 28th.

This morning's January Personal Consumption Expenditures, or PCE, price index is the market's next signpost in what's become a forgettable February. Analysts expect the report, due at 8.30 a.m. ET, to show headline and core PCE of 0.3% monthly, with core stripping out volatile food and energy prices. Annual PCE is expected to etch lower at 2.5% and 2.6%

for Headline and Core, respectively, compared with 2.6% and 2.8% in December. The data come after another weak day reflecting poor performance by the mega caps despite Nvidia's strong earnings.

Tariff fears have sent many risk-on investors to the sidelines. The S&P 500 index fell below key support at its 100-day moving average and closed below 5,900 for the first time since mid-January and is now down since the inauguration and more than 4% below its all-time high close posted just a week ago. The tech-heavy Nasdaq composite has fallen more than 3% year-to-date.

Volatility also surged this week. The SIBO volatility index of the VIX rose above 20 yesterday, a level that often signals market struggles ahead. The SPX struggled in February, falling more than 2.6 percent so far this month.

January's consumer price index, or CPI, and producer price index, or PPI, both were hotter than expected. But parts of PPI that affect PCE were cooler than expected. That's why hopes grew for PCE progress, but any failure could push yields up.

Treasury yields edged higher yesterday as President Trump reinforced ideas he'd impose tariffs on Canadian and Mexican imports starting next Tuesday and threatened additional 10 percent tariffs on Chinese goods on top of the 10 percent he announced a few weeks ago. Tariffs can be inflationary, possibly explaining why yields rose, but they remain near two-month lows.

The recent drop in yields reflects concerns about possible slowing economic growth. Late this week, the 10-year Treasury note yield fell below the three-month yield. Yield curve inversion is considered a recessionary signal, though it's not a guarantee.

Growth scare evidence is surfacing, whether it's declining bond yields, the 10-year-slash-3-month inversion, Walmart's weak forward guidance, soft retail sales, services PMI dropping into contraction territory, consumer sentiment, pending home sales, and the initial jobless claims jump, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

Right now, markets are concerned about a growth slowdown, meaning bad news is bad news, and markets are going to be more sensitive to economic data. This could translate into weaker PCE inflation data, for that matter, which would have been bullish a month ago, but maybe not now. With sentiment the way it is, disinflation might be seen pointing toward a worse slowdown.

Data yesterday painted a mixed picture, but generally painted a picture of slowing growth. The government's second estimate of U.S. fourth-quarter gross domestic product, or GDP, reached a seasonally adjusted annual rate of 2.3 percent, in line with consensus and unchanged from the first estimate. Third-quarter GDP growth was 3.1 percent.

Initial weekly jobless claims jumped to 242,000, well above consensus of 220,000, up 22,000 from the prior week, and a four-month high. One month doesn't necessarily mark a trend, but a sustained rise in initial jobless would be worrisome, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research.

The market is still buzzing over NVIDIA's earnings earlier this week, but also watching every word from CEO Jensen Huang. In the release, Huang called demand amazing for the company's new Blackwell chip, but some noted that amazing isn't quite as positive as the insane accuracy.

adjective he used last fall to describe AI chip demand. That was before Blackwell hit the market. Blackwell generated $11 billion in fiscal fourth-quarter revenue, Huang said.

But February turned into a not-so-magnificent month for the Magnificent Seven, including Nvidia, shares of which fell sharply yesterday as investors focused on falling margins and slower revenue growth. Many of the seven are down double digits from recent highs, partially a reflection of tariff and export control worries, but also thanks to risk-off sentiment that's shifting money toward defensive areas like treasuries, staples, and health care.

Energy led all sectors yesterday, but real estate and staples also were in the top five. Infotech brought up the rear. The equal weight S&P 500 fell yesterday, but far less than the SPX, again pointing up how much of the weakness in major indexes is due to the very small handful of mega cap stocks and their current struggles. Technically, yesterday looked weak on the charts as major indexes closed near their lows.

Retail earnings accelerate next week with Costco, Best Buy, Foot Locker, and Target. Next week also features the March 7th non-farm payrolls report. January's slightly light jobs growth of 143,000 might have been affected by wildfires and snowstorms, so it will be interesting to see if February bounced back or if companies refrained from hiring amid policy uncertainty.

As of late Thursday, the CME FedWatch tool put rate pause odds near 95% for the next month's Federal Open Market Committee meeting. But chances of a rate cut by the June meeting topped 70%. There's a 25% chance of a trim by the May meeting.

The SPX crumbled 94.49 points Thursday, or 1.59%, to 5,861.57. The Dow Jones Industrial Average lost 193.62 points, or 0.45%, to 43,000.

239.50, and the Nasdaq Composite slipped 530.84 points, or 2.78%, to 18,544.42. This has been the Schwab Market Update Podcast.

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