Zacks Investment Management

Market conditions are changing rapidly. This issue of Steady Investor covers the three trends investors can’t ignore:

• Oil drives inflation uncertainty
• Payroll drop, income steady
• China trade shows global resilience

February’s Inflation Report was Just Released, but It’s Already Old News – The inflation story got better in February. According to the Bureau of Labor Statistics, consumer prices rose 2.4% from a year earlier and core inflation held at 2.5%.¹

On its own, that would normally be welcome news for investors hoping the Federal Reserve is getting closer to cutting interest rates. But markets are already looking past that report.The reason, of course, is oil prices. In other words, the inflation print was less of a fresh read on where inflation is going, and more a snapshot of where it stood pre-energy shock. Oil prices trickle through to transportation costs, shipping, air travel, plastics, chemicals, fertilizers, and a wide range of goods and services across the economy. If oil prices move up sharply but then fall back quickly, the inflation impact may prove limited. We’ve seen a lot of price volatility like that to date. But if prices stay elevated for weeks or months, the risk is that higher energy costs start feeding more broadly into consumer prices and business expenses. Enter the Federal Reserve. The February inflation numbers, coupled with a weak jobs report (see below), set the stage for another rate cut perhaps this spring. That picture is complicated now. Markets are trying to determine whether this is a temporary commodity spike or the start of something bigger. In our view, markets appear to be pricing in the latter, i.e., a supply shock with a longer tail that keeps prices elevated for a long stretch of time. While that outcome is certainly possible, it also sets the markets’ base case as the worst-case scenario—meaning that even a slightly better-than-expected outcome can send prices sharply in the opposite direction.

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A Weak February Jobs Report Puts Labor Markets Back in Focus – February’s jobs report raised a few eyebrows. The Bureau of Labor Statistics reported that the U.S. lost 92,000 jobs for the month, with the unemployment rate ticking slightly higher to 4.4%. Revisions to previous months also meant trimming payrolls by a combined 69,000, which together solidified the narrative that the jobs market is weakening.⁴

But the details suggest investors should be careful about overreading a single payroll report. Some of February’s weakness appears tied to factors that may not prove durable, including strike-related losses in health care and continued reductions in federal payrolls. Health care employment fell by 28,000 in February, with physicians’ offices alone losing 37,000 jobs due primarily to strike activity. Federal government employment fell another 10,000 and is now down 330,000 from its October 2024 peak. More importantly, payroll growth is only one way to look at the labor market’s economic impact. Household spending depends less on one month’s hiring number than on whether income continues to grow. On that front, the picture is firmer than the payroll headline implies. Average hourly earnings rose 0.4% in February and were up 3.8% from a year earlier, while the aggregate weekly payrolls index for total private workers was up about 4.4% over the past year. In other words, even with payroll growth choppy, total labor income is still moving higher, and that’s key for consumer spending—the main engine of the U.S. economy.

China’s Trade Surge is Another Sign Global Growth Has Held Up – China’s latest trade data were stronger than expected, with exports rising 21.8% in January and February from a year earlier and imports climbing 19.8%, pushing the country’s trade surplus to about $213.6 billion. Some of that strength may reflect Lunar New Year timing, since the holiday shifts between January and February each year. But the broader message, in our view, is that China’s trade engine is still running strongly despite tariffs, weaker trade with the U.S., and widespread skepticism about the country’s economic outlook. The regional details make that picture even more interesting. Exports to the U.S. fell 11% from a year earlier, but that weakness was offset by strong gains elsewhere, including nearly 28% growth in exports to the European Union, 16% growth to Latin America, and solid gains across the rest of Asia, including Japan and India. That suggests China’s export sector remains highly adaptable, finding demand across a broad global customer base.In our view, this report tells us just as much about the global economy as it does China. It is another sign that the global economy has remained more resilient than many expected.⁶

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• Why annual reviews are essential for staying on course
• How a research-driven advisor can help reinforce durability
• And more…

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Disclosure