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WEEK AHEAD
March 31-April 4, 2025
Our technical signals held steady after another week of volatility and tariff fears. Our tactical position remains in a weakened, fully allocated position for now and is closely monitored.
Inflation Worries and Auto Tariff Concerns
Investor sentiment turned cautious this past week as inflation fears resurfaced and economic growth showed signs of slowing. The University of Michigan's Consumer Sentiment Index fell sharply to 57.0, marking an -11.9% from February and a staggering -28.2% from a year ago. This sharp decline reflects growing concerns about persistent inflation and the broader economic outlook.
The Federal Reserve's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, rose 0.4% in February, pushing the year-over-year rate to 2.8%, both figures exceeding market expectations. Meanwhile, consumer spending increased 0.4% for the month, falling short of the projected 0.5% rise, even as personal income surged by 0.8%, doubling economists' estimates. The discrepancy suggests consumers may be growing cautious amid elevated prices.
The U.S. economy also showed signs of slowing. The revised fourth-quarter GDP data indicated a 2.4% annualized growth rate—an improvement over the previous 2.3% estimate but a marked deceleration from the 3.1% expansion recorded in the prior quarter. The revision was primarily driven by a decline in imports, which offset weakening investment activity.
Geopolitical and trade tensions also added to market volatility. On Wednesday, President Donald Trump announced a new 25% tariff on imported cars and key auto parts, effective April 3. While vehicles and parts qualifying under the US-Mexico-Canada Agreement (USMCA) are currently exempt, the administration is considering narrowing this exemption, a move that could have significant implications for automakers and global supply chains.
Volatility Returns as Inflation Data Disappoints
The equity market faced renewed pressure as inflation data came in hotter than expected, dashing hopes for near-term rate cuts. The S&P 500 ended the week lower, extending its March movement to nearly -5%.
Investors adopted a defensive posture, with Consumer Staples (+1.8%), Energy (+0.7%), and Gold (+2%) emerging as the best-performing sectors. All other sectors ended the week in negative territory, reflecting a risk-off sentiment amid economic uncertainty and trade policy concerns.
Among individual stocks, NVIDIA (-6.97%) continued its decline. In comparison, Tesla (5.97%) bucked the broader trend, benefiting from the Trump administration's new tariffs, as it remains the only automaker that manufactures and assembles 100% of its vehicles in the U.S. Meanwhile, Apple retained its position as the only company with a market capitalization above $3 trillion, highlighting its resilience in a turbulent market environment.
In the bond market, the yield curve steepened following the Core PCE report, with 30-year Treasury yields breaking past 4.64%, marking a 5-basis-point increase from the previous week.
What is Ahead
Despite the S&P 500's weakening in March, there may be hopes for a rebound in April, traditionally the second-best month for the index. Amid the uncertainties of the broader economic environment, a key factor will be whether the market can sustain momentum. All eyes will be closely watching Friday's jobs report, with nonfarm payrolls and unemployment data set to offer key insights into the labor market's resilience. Before that, investors will parse through ISM manufacturing and services PMIs, JOLTS job openings, and ADP employment figures for early signals on economic momentum.
"Inflation is taxation without legislation."
— Milton Friedman
CPI vs. Core PCE: The Inflation Metric the Fed Actually Follows
Fed has PCE on Speed Dial: Why the Fed's Got PCE on the Brain (and CPI in the Corner)
The inflation data love triangle no one asked for—but the Fed can't quit. If CPI is the loud, headline-grabbing ex, then PCE is the stable high school crush that knew you when. Most investors track CPI like their FanDuel account, but Powell & Co. are whispering sweet nothings to a different metric. Why? Because core PCE doesn't just measure prices—it reflects behavior. And in the Fed's playbook, behavior drives policy.
Two Inflation Metrics Walk into a Bar…
CPI gets the spotlight. It's what investors, journalists, and Main Street watch. Released early in the month, it's prime-time CNBC drama, measuring average price changes for food, housing, transportation, and healthcare. Then there's PCE—the Personal Consumption Expenditures index. Quieter, broader, and more nuanced, it adjusts for what people actually do when prices change. In short, CPI is retail therapy. PCE is a household budget spreadsheet. CPI shapes sentiment; PCE shapes policy.
Why the Fed's in a Long-Term Relationship with PCE
Core PCE strips out food and energy, accounts for substitution (switching from beef to chicken), and pulls data from businesses rather than consumers. That makes it more stable and, in the Fed's eyes, more predictive. Powell's made it clear: CPI might make noise, but PCE makes the call. It's the inflation equivalent of watching someone's Spotify history instead of their social media posts. One shows what they say they like. The other shows what they actually listen to.
CPI Moves Markets. PCE Moves Policy.
Ironically, CPI moves faster and hits harder. It's released earlier, has more media coverage, and includes stickier components like rent and groceries. That's why markets flinch when CPI surprises—but the Fed stays the course, trusting PCE's cooler read. We saw it play out in 2023 and 2024. CPI ran hot, markets panicked, but the Fed kept its eye on PCE's disinflation story.
What the Fed's Obsession Tells Us Now
As of early 2025, core PCE is drifting toward 2%, even as CPI clings to its stickier components. Translation? The Fed sees cooling beneath the hood, even if headlines haven't caught up. This gives Powell optionality. It doesn't guarantee a rate cut, but it sets the table. If you're still trading CPI headlines, you're a step behind. When PCE cools, long-duration assets warm up. Growth sectors breathe easier. Housing and retail pick up. Credit spreads tighten.
The Bottom Line: PCE Is the Fed's Tell
Every investor watches inflation. However, not every investor understands which inflation indicator matters. PCE isn't just a number—it's the Fed's inflation compass. So next time CPI hits and markets panic, ask yourself: what's PCE doing? Because in this game, knowing which data the Fed trusts separates signal from noise. CPI may walk, but PCE runs the show.
Further Reading: Inflation Metrics That Matter
If you want to dig deeper into how inflation metrics differ and why the Fed favors PCE over CPI, check out these resources:
Why does the Federal Reserve prefer PCE inflation over CPI? (Federal Reserve)
Personal Consumption Expenditures (PCE) Price Index (Bureau of Economic Analysis)
Consumer Price Index (CPI) Overview (Bureau of Labor Statistics)
Chart: Data obtained from the Federal Reserve Bank of St. Louis
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.