The American stock market exhibited minimal movement in the first week of February, with the S&P 500 index largely staying stable, while the Nasdaq and Dow Jones indices experienced a drop of approximately 0.5%. Investors grappled with the earnings reports from major tech companies, a surprisingly robust non-farm payroll report for January, and ongoing updates regarding U.S. tariff policies.

This week is poised to showcase key financial market developmentsThe upcoming release of the U.SJanuary Consumer Price Index (CPI) and Producer Price Index (PPI) data is anticipated to yield crucial insights regarding inflation trends in the United StatesFederal Reserve Chair Jay Powell is scheduled to attend congressional hearings, where markets will be keenly attentive to any signals related to the timing of potential interest rate cutsConcurrently, U.S. tariff policies remain a considerable factor influencing market conditions – it was announced last week that the U.S. would introduce reciprocal tariffs against several countries this week.

From an earnings perspective, several prominent companies, including McDonald's, Coca-Cola, AMD, and Airbnb, are set to disclose their latest financial results.

In its market outlook, Charles Schwab indicated that trade disruptions caused by tariffs, coupled with potential inflationary pressures, have negatively influenced market sentimentThe firm acknowledged that while the recent decline in 10-year U.STreasury yields has been favorable for the stock market, it seems to correlate with lowered expectations for long-term economic growthThe uncertainty surrounding the extent and duration of tariff increases, as well as their economic impact, has reignited volatility in the market.

Inflation has resurfaced as a critical focal point.

Currently, investors are redirecting their attention to inflation data in search of clues that might impact future benchmark interest rate projectionsThe U.SJanuary CPI is set for release this Wednesday, with Wall Street economists forecasting a year-on-year increase of 2.9% – consistent with the previous figure

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The core CPI, which excludes food and energy prices, is expected to rise by 3.1% year-on-year, a slight decrease from the prior 3.2%.

The January PPI for the U.S. is also scheduled for release on WednesdayEconomists predict a year-on-year increase of 3.2% for the PPI, a marginal decline from the previous 3.3%. The core PPI is expected to increase by 3.3%, down from 3.5% previously reported.

Furthermore, the U.S. retail sales report for January – often referred to as “fearful data” – will be made public on FridayEconomists anticipate a month-on-month decrease of 0.1% in retail sales, following a previous gain of 0.4%.

Should the forthcoming inflation data indicate persistent inflationary trends, or if retail sales data reveal strong consumer support, market expectations for a Federal Reserve rate cut could be dampened furtherAnalysts have suggested that previous signs indicating stickiness in U.S. inflation have heightened speculation regarding the potential for unchanged interest rates in the coming monthsThe money markets expect the Fed may cut rates in June or July, but pricing remains cautious about multiple cuts throughout the year.

Even though the corporate earnings reports released last week largely exceeded expectations, the stock market has struggled to find a clear direction, with macroeconomic factors continuing to drive volatilityOn Friday, U.S. equities dipped after the latest University of Michigan Consumer Sentiment Survey revealed respondents’ one-year inflation expectations soared to their highest level since November 2023.

Data indicated that the one-year inflation rate expectation in February jumped from the previous 3.3% to 4.3%; this marks the fifth time in 14 years that one-year inflation expectations have risen by over one percentage pointThe increase in inflation expectations is attributed, in part, to widespread perceptions that it may be too late to avoid the adverse effects of tariff policies.

Jay Powell’s upcoming addresses will be closely scrutinized.

Powell is set to testify before both the Senate and House on Tuesday and Wednesday regarding the semiannual monetary policy report

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His remarks during these hearings are anticipated to provide greater clarity on the Fed’s interest rate trajectory.

Market participants will be particularly attentive to his perspectives on the economic outlook, inflation targets, and interest rate policiesIn January, Powell indicated that the Fed is not in a hurry to implement further rate cutsAnalysts speculate that he might emphasize economic resilience as a pivotal reason for the Fed’s cautious stance regarding rate cutsGiven the sound condition of the U.S. economy, Fed officials may take their time assessing the new government's impact on trade, immigration, and tax policy changes.

The evolving landscape of U.S. tariffs remains a significant concern.

Last week, the U.S. announced that it would introduce reciprocal tariffs against numerous countries this weekJust prior to the opening of Asian markets on Monday, American officials threatened to impose a new 25% tariff on all steel and aluminum importsAdditionally, a press conference scheduled for Tuesday or Wednesday aims to reveal detailed information regarding these reciprocal tariffs.

Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, mentioned in a report last Friday that it could take two lackluster employment reports to trigger discussion on the Fed potentially restarting its cycle of rate cutsHowever, the risks surrounding U.S. policy, including tariffs and immigration crackdowns, may muddle the outlookRieder stated, “As we and the Fed pay close attention to employment and inflation reports, we also need to monitor market news and the reactions surrounding these events to understand when the Fed and market makers might gain confidence in bringing rates closer to long-term neutral levels.”

Goldman Sachs also noted that the high tariffs could exert pressure on U.S. equities, particularly regarding earnings expectations and overall returns for the S&P 500. They articulated that if company management opts to absorb the heightened input costs, profit margins could face squeeze, or if companies pass on the higher costs to consumers, sales volumes may be jeopardized

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