Good Thursday AM from your Hometown Lender,

February producer prices (unchanged for the month, lower than expected, +3.2 percent year over year, about as expected) and weekly jobless claims (220k, a shade lower than expected) led off today’s economic calendar. PPI was expected to increase 0.3 percent month-over-month and 3.5 percent year-over-year versus 0.4 percent and 3.5 percent previously. The bond market is mostly flat and equities are hurting a bit. The uncertainty around tariffs, aid, etc. is not helping any US markets for the moment (this will change again shortly). The conversations are moving from inflation to stagflation where inflation is stuck and growth is stuck below 2%.

The WSJ shared a good piece on it this AM.

The market’s first reaction to economic news is often wrong. Yesterday its second take might have been too.

A cooler-than-expected report on consumer prices spurred a 2% jump in the hard-hit Nasdaq Composite Index that faltered in time to ruin traders’ lunches. Weaker inflation should make the Fed more comfortable cutting interest rates, which is good for stocks.

That was the initial thought by futures traders who bet on such things. By Wednesday evening, though, the odds of rates being any lower by May had dropped to less than half what they had been before the report, according to CME FedWatch.

We’ll know a lot more a month from now when we see the first big impact of tariffs on prices. The odd combination of growth and inflation worries the levies have stoked has a word that first gained traction in the 1970s making a comeback: stagflation.

The portmanteau of stagnation and inflation is a scary one for central bankers because they blew it so badly back then. When oil prices spiked after the 1973 Arab oil embargo, the Fed’s strategy was to avoid piling pain onto a reeling economy by tightening policy too much. Inflation stayed high for long enough, though, that it became entrenched in expectations, requiring painful rate hikes to tame it.

More recently the Fed kept interest rates at zero for so long after the Covid emergency that, along with supply-chain and labor-market snafus, it helped inflation reach a four-decade high. The public’s frustration was heard loud and clear at the ballot box.

But markets might be getting things half wrong this time by underestimating the “stag” and worrying too much about “flation.” One reason is obvious: Tariffs can be removed at the stroke of President Trump’s sharpie. On Tuesday alone he doubled planned levies on Canadian metals to 50% and then changed his mind within hours.

But there’s another, less-understood factor—a reversal of the wealth effect. Doug Ramsey, chief investment officer at Leuthold Group, points out that the value of stocks compared with U.S. gross domestic product rose above 200% at the start of this year. That’s twice the proportion before the financial crisis and three times as much at the time of the 1987 stock-market crash.

The upshot is that, while we technically aren’t in a bear market yet, the loss of wealth already is consistent with past ones. The financial and psychological hit to household finances will dampen inflation by discouraging spending. And possibly spur a consumer recession. The richest 10% of Americans own the vast majority of stocks, according to Fed data, and they were the only income cohort not pinching pennies recently. Now they might too.

Meanwhile, the other knock-on effect of tariffs, and of constantly shifting messages about them, has been that companies suddenly can’t decide whether, or where, to invest. So a business recession, or at least a slowdown, is more likely too.

The good news is that any spike in inflation could be fleeting. The less-good news is that Fed rate cuts are probably coming, but not because of the “soft landing” economists were predicting just a few months ago. This one could be bumpy and painful.

Stay safe and make today great!