1. Data Overview: Inflation Cools Down but There Are Still Concerns
In February 2025, the year-on-year growth rate of the US Consumer Price Index (CPI) slowed to 2.8%, lower than the previous value of 3% and the market expectation of 2.9%; the month-on-month growth rate was 0.2%, the lowest since October 2024. The year-on-year growth rate of the core CPI (excluding food and energy) fell back to 3.1%, up 0.2% month-on-month, indicating that inflationary pressure has eased, but stickiness remains.
Despite the cooling of the data, housing costs contributed nearly half of the increase, and the annualized growth rate of food prices reached 4.1% (the highest in two years). Combined with the Trump administration's tariff policy on the price of imported goods, the upward risk of inflation is still significant.
2. Market reaction: short-term optimism and long-term caution intertwined
Asset price fluctuations
Gold: After the release of CPI data, gold rose by $6 to $2,920/ounce in the short term, reflecting the market's rising expectations for interest rate cuts, but it is still supported by the risk of economic recession in the long term.
U.S. Treasury bonds and the U.S. dollar: The 10-year U.S. Treasury yield remained around 4.1%, and the U.S. dollar index rebounded to 103.6 after a brief decline, indicating that investors have different views on the Fed's policy path.
Stock market: S&P 500 futures rose slightly, but technology stocks that were previously hit by the unexpected CPI in January still face valuation pressure, while financial stocks have diverged due to fluctuations in interest rate expectations.
Chinese concept stocks and specific industries
Chinese concept stocks continued the rebound trend since January, the Nasdaq China Golden Dragon Index rose, and companies such as Alibaba benefited from China's favorable policies and improved earnings expectations. Energy and healthcare sectors are attracting attention due to their anti-inflation properties, while technology stocks need to be wary of the long-term impact of interest rate sensitivity.
3. Fed policy expectations: bets on rate cuts are rising, but the path is complicated
Adjustment of rate cut expectations: Traders' bets on the number of rate cuts in 2025 have risen from 60 basis points to 80 basis points, and the first rate cut may be brought forward to June, but if inflation rebounds, it may be postponed again.
Fed attitude: Although Powell emphasized the focus on the PCE indicator, the easing of CPI in February bought him time to wait and see. However, if tariff policies continue to push up costs, the possibility of rate hikes has not been completely ruled out.
Risk of recession: Goldman Sachs and JPMorgan Chase raised the probability of a US recession to 20% and 40%, respectively, and concerns about stagflation have increased the complexity of policy making.
4. Long-term challenges: structural inflation and policy game
Inflation drivers
Housing and food: Housing costs increased by 0.27% month-on-month, and food prices continued to rise due to avian influenza and supply chain disturbances, becoming a stubborn support for core inflation.
Tariff impact: The Trump administration's imposition of tariffs on Asian imports has led to rising prices of furniture, electronic products, etc., which may be further transmitted to the consumer end in the future.
Policy and market game
The Federal Reserve needs to balance the dual goals of curbing inflation and avoiding a hard landing of the economy. If inflation is higher than 2.5% for a long time due to factors such as tariffs, it may be forced to restart interest rate hikes, which will in turn impact highly leveraged industries. The weakening of corporate cost-passing ability may increase profit pressure and trigger stock market fluctuations.
5. Investor strategy recommendations
Diversified allocation: Increase holdings of defensive assets (such as medical and consumer essentials) and financial stocks that benefit from rising interest rates, and reduce technology stock positions.
Pay attention to data and policy signals: Closely track PPI, employment data and Fed meeting minutes, especially changes in inflation expectations indicators (such as the University of Michigan Consumer Survey).
Balance between gold and bonds: In the short term, gold may be suppressed by US Treasury yields, but it can be allocated for the long term under the risk of economic recession; when the US Treasury yield curve steepens, long-term bonds can be deployed at the right time.
6. Conclusion
Although the February CPI data brought a respite to the market, inflation stickiness and policy uncertainty still pose dual challenges. Investors need to seek a balance between optimism and risk prevention, focusing on the persistence of inflation drivers and the Fed's policy fine-tuning. In the coming weeks, the wholesale price index and non-agricultural data will provide a clearer economic picture, and the market may enter a new round of shock cycle.
*Disclaimer: The content of this article is for learning purposes only. It does not represent VSTAR’s official position and cannot be used as investment advice.
