Slumping Industrial Production Screams “Stagflation!”

Today, the stock market took a slight dip, putting Wall Street on track for a loss this week. The dip came as investors mulled over the implications of recent high inflation figures on the Federal Reserve’s upcoming policy decisions.

The S&P 500 dropped by 0.5%, the Dow Jones Industrial Average fell by 0.2% or 100 points, and the Nasdaq Composite saw a decrease of 0.9%.

This downturn followed losses across the board yesterday, triggered by another inflation report that came in higher than anticipated. This has led investors to reconsider their expectations for a rate cut in June, as persistent inflation may prove more challenging to reduce than the Fed had hoped, potentially weakening the argument for reducing rates.

With today lacking significant data releases, attention is shifting toward the February PCE report — the inflation metric preferred by the Fed. However, this information won’t be available until near the end of March, following the Fed’s next policy decision.

In the meantime, Bitcoin experienced a retreat from its recent peak above $73,000, with its value hovering just above $68,000 in late-morning trades. Crypto-related stocks also saw initial declines, though MicroStrategy nearly broke even and Coinbase rose by 1.5%.

In corporate news, Adobe’s shares dropped more than 14% after the company issued a quarterly sales forecast that raised concerns about competition from AI startups.

US Industrial Production data in January, which was revised from a 0.1% decline to a sharper 0.5% decline, also shook up markets this morning. This marks the 10th month in the last 11, and the 14th in the last 17 months, where figures have been adjusted downwards.

February’s Industrial Production edged up by 0.1% month-over-month, yet this leaves the year-over-year change in Industrial Production at -0.23%. Capacity Utilization remained unchanged at 78.25% in February.

Focusing solely on manufacturing, production saw a 0.8% month-over-month increase. However, this comes after January’s figures were significantly revised downwards from a 0.5% decline to a 1.1% decline.

This trend of constant downward revisions raises questions about when the optimistic survey data (ie, “soft data”) will align with the stark reality of these revised production figures (“hard data”).

These continual adjustments downwards are likely to have an impact on GDP forecasts, adding another layer of complexity to the economic outlook. In theory, this could clear the Fed to cut rates sooner rather than later. But after two hot inflation reports – the February CPI and PPI – the Fed might not want to start slashing just yet. The market seems to be realizing that, which could finally knock stocks lower in their first significant post-rally correction.


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