Wall Street Surges on Inflation Cooldown

Wall Street opened higher on Wednesday, March 12, 2025, after an encouraging inflation report showed a welcome slowdown in inflation. The Consumer Price Index (CPI) data for February 2025 revealed that inflation cooled to 2.8%, below the estimated 2.9%. This lower-than-expected reading sparked a relief rally in the markets, with the Dow surging 703 points, or 1.65%, to close at 43,222. The S&P 500 rose 1.83% and the tech-heavy Nasdaq Composite ended the day higher by 2.45%.

The rally was partly driven by the encouraging inflation report, which alleviated some of the pressure on stock and bond markets. Chris Zaccarelli, chief investment officer at Northlight Asset Management, noted, "We believe the market will be encouraged by the decrease in core inflation, which should alleviate some of the pressure on stock and bond markets, both of which have had a poor start to the year on inflation fears and concerns the Federal Reserve would not only stop cutting interest rates, but could even reverse course and begin raising them."

The decrease in core inflation to 3.2% year over year, down from 3.3% since September 2024, is a significant improvement that should alleviate some of the pressure on stock and bond markets. This is supported by the statement from Chris Zaccarelli, chief investment officer at Northlight Asset Management, who said, "We believe the market will be encouraged by the decrease in core inflation, which should alleviate some of the pressure on stock and bond markets, both of which have had a poor start to the year on inflation fears and concerns the Federal Reserve would not only stop cutting interest rates, but could even reverse course and begin raising them." Additionally, the VIX, Wall Street’s fear gauge, fell more than 13% on Wednesday as investors felt a moment of relief, further indicating that the decrease in core inflation is a positive development for the market.



However, the market volatility was also influenced by political uncertainties, such as Donald Trump’s recession comments and concerns over tariffs. On Tuesday, the Dow fell 1.14%, the S&P 500 dropped 0.76%, and the Nasdaq slipped 0.18%. This volatility was exacerbated by the uncertainty surrounding the Federal Reserve's next policy move. A stronger-than-expected reading could push back Fed rate cut expectations, triggering a sell-off in equities and bonds. Conversely, a softer print could fuel a relief rally, especially in tech and large-cap stocks, which have struggled in recent sessions. The VIX, Wall Street’s fear gauge, fell more than 13% on Wednesday as investors felt a moment of relief, indicating that the market was sensitive to inflation data and political uncertainties.

Additionally, the proposed tariffs by US President Donald Trump added to market jitters, as analysts and economists warned that these could fuel inflation. The CPI data was a key test for these forecasts, shaping expectations for the Federal Reserve’s next policy move. Goldman Sachs has lowered its 2025 US GDP growth forecast to 1.7% from 2.4%, citing worsening trade policy expectations. Chief economist Jan Hatzius noted that the bank now expects the average US tariff rate to rise by 10 basis points this year, double its previous estimate. This downgrade was due to the adverse trade policy assumptions and the administration managing expectations towards tariff-induced near-term economic weakness.

In summary, the latest inflation figures have a direct impact on investor sentiment and market volatility. A lower-than-expected inflation rate can spark a relief rally, while political and economic uncertainties, such as proposed tariffs and recession comments, can add to market jitters and volatility. The market's reaction to the inflation data and political uncertainties highlights the sensitivity of investors to these factors and their influence on market movements.