Stock markets are justified in reacting cautiously to the latest U.S. inflation report. In February, the Consumer Price Index increased to 0.3% month-on-month, compared to 0.2% in January.
Core CPI, which excludes the necessities of food and energy, increased by 0.2% or by 2.5% on a Y/Y measure. Despite meeting expectations, the CPI data is the last “good” data point that markets will get. This month, the U.S./Israel war in Iran sent WTI crude prices to around $100/bbl. The energy sector wrongly speculated that the conflict would end soon. Prices dipped to below $80 on March 10, only to climb higher since then.
The BLS reported that medical care (+0.5%), apparel (up by 1.3%), and airline fares (+1.4%) were some of the most notable index increases. Airline stocks have been trading sharply lower in the last year. Shares of American Airlines (AAL) plunged by nearly one-third in just one quarter. Airline firms face higher oil prices, which raise ticket prices. Additionally, the Middle East conflict disrupts flight schedules.
Last week, bank stocks fell meaningfully. Wells Fargo fell by 7.9% while Mastercard (MA) dropped by 4.7%. Credit cards and banks are pricing in an economic slowdown, a tightening in credit conditions driven by uncertainties in the war, and high inflation rates, preventing the Fed from cutting interest rates.
