Inflation

Inflation has re-emerged as the dominant constraint on monetary policy after a period of apparent moderation. The December 2025 Personal Income and Outlays report delivered a meaningful upside surprise: headline PCE rose 0.4% MoM, pushing the YoY rate to 2.9% from November's 2.8%, while core PCE—the Fed's preferred gauge—printed 0.4% MoM and 3.0% YoY, accelerating from 2.8% the month prior. Over the trailing three months, both headline and core PCE are running at a 3.1% annualized rate, decisively above the 2% target and sufficient to justify extended Fed patience. The full-year 2025 PCE price index rose 2.6%, marginally above 2024's 2.4%, confirming that disinflation has stalled rather than continued its 2023–2024 trajectory.

Services inflation remains the structural problem. Shelter and owner's equivalent rent, healthcare, and financial services have proven far more persistent than goods deflation can offset. The Conference Board's February consumer survey reinforces this picture: inflation and prices topped write-in concerns, and consumers expect interest rates to remain elevated over the next 12 months. Wage growth at 3.8% YoY maintains upward pressure on services costs. The SCOTUS tariff ruling introduces a meaningful inflation wildcard—while the IEEPA invalidation removes one inflationary channel, the rapid replacement via Section 122 and the administration's stated intention to escalate to 15% means effective consumer price impacts of 0.6% or more in the near term per the Yale Budget Lab's estimates remain probable.

The Federal Reserve's posture is unambiguously on hold. Fed Governor Christopher Waller stated on Monday that he is open to holding rates unchanged in March if February jobs data shows continued labor market strength, an explicit signal that the committee's bar for resumption of cuts is high. Governor Susan Collins followed on Tuesday, arguing that holding steady is "likely appropriate" amid persistent inflation risks. These communications represent a concerted effort to push back on market pricing that still embeds approximately three 25bps cuts in 2026. The 2s10s curve has steepened to +61bps as of Tuesday's close—consistent with markets assigning a modest probability to medium-term easing—but the front end reflects a significantly more hawkish near-term baseline than implied by a conventional inflation-convergence path.

Risk and Positioning

Tuesday's session registered a risk-on recovery, but the character of that recovery warrants scrutiny. The S&P 500's +0.77% gain was disproportionately driven by AMD (+8.8% on a reported Meta GPU deal), software stocks reversing Monday's AI-displacement selloff, and select mega-cap tech names. The VIX compression from 21.01 to 19.55 (−6.95%) confirmed short-term fear receding, yet 19.55 is not a complacent reading—it remains well above the sub-16 levels that characterized the market's risk-on baseline through much of late 2025. The risk-off session on Monday (SPX −1.04%, VIX +10.06% to 21.01) and Tuesday's partial recovery describe an oscillation driven by event-driven uncertainty rather than a durable sentiment shift. The Conference Board's Consumer Confidence reading of 91.2—still 21 points below the November 2024 peak of 112.8 and with an Expectations sub-index at 72, below the 80 threshold historically associated with recessionary signals—underscores that underlying sentiment remains structurally fragile.

From a positioning standpoint, several contradictions deserve attention. Equity indices are recovering toward recent highs despite a macro regime that has weakened measurably: Q4 GDP at 1.4%, consumer confidence trending lower, and a trade policy environment characterized by genuine legal and procedural uncertainty. The S&P 500 at 6,890 trades at a forward P/E that remains historically elevated relative to a 10Y yield of 4.05%—the equity risk premium is compressed, and any meaningful yield reversal would challenge current valuations without corresponding earnings growth. Gold's continued strength—briefly reaching $5,168 per troy ounce during Monday's tariff shock session—and the dollar's year-over-year decline of nearly 8% signal persistent reserve-currency pressure and safe-haven demand that equities are currently discounting.

Credit markets have been broadly resilient, consistent with a labor market that remains intact even at reduced hiring momentum. The 2s10s curve's steepening to +61bps is a meaningful signal: 14 months ago this spread was in deep inversion, and the normalization reflects both a reduction in near-term recession probability and the market's acknowledgment of structurally higher longer-term rates relative to a well-anchored but elevated fed funds rate. The key tail risk in credit would emerge if the tariff replacement regime pushes corporate input costs high enough to compress margins in rate-sensitive sectors—consumer discretionary, industrials, and small-cap levered borrowers—that have already seen reduced earnings momentum.

Sector and Cross-Asset Analysis

Tuesday's leadership told a bifurcated story. Technology and communication services drove the recovery, with the Roundhill Magnificent Seven ETF (MAGS) gaining 1%—Apple and Amazon each adding approximately 2.3% and 2.1%, respectively—while the software complex (IGV +1%+) reversed Monday's near-5% collapse. AMD's near-9% surge following the Meta GPU partnership announcement was the single largest individual catalyst of the session, reinforcing the market's continued willingness to assign premium valuations to confirmed AI infrastructure spending. Notably, Alphabet was a material divergence from the Mag-7 move, sitting modestly below flat on lingering AI displacement concerns—a signal that differentiation within large-cap tech is increasing as competitive dynamics evolve. The Russell 2000's +1.20% outperformance of the SPX was notable and deserves monitoring: small caps may be interpreting the Section 122 tariff regime as less punishing than the prior IEEPA structure, given their greater domestic revenue orientation.

Cross-asset dynamics reflect the tension inherent in a transitional regime. The 10Y yield rebounded mildly to 4.05% from Monday's near-three-month low of 4.03%, as the flight-to-safety bid from Monday's equity rout partially unwound. Yet rates remain meaningfully below the 4.26% reading from January month-end, a 21bp decline that has provided material support to equity valuations. The DXY's +0.12% session was tepid given the Section 122 tariff announcement—historically, tariff escalation would drive more aggressive dollar appreciation. The dollar's year-over-year decline of approximately 8% reflects structural capital flow pressures, including the erosion of U.S. safe-haven premium as trade policy unpredictability mounts. Gold's positioning near all-time highs (briefly above $5,168 during peak Monday uncertainty) is consistent with institutional de-dollarization hedging by sovereign wealth funds and central banks—a structural bid that is unlikely to reverse quickly.

Healthcare, staples, and utilities—traditional defensive sectors—underperformed on Tuesday, consistent with risk-on rotation mechanics. Financial sector behavior warrants monitoring: banks benefit from the steeper yield curve (+61bps 2s10s) but face credit quality headwinds if the growth deceleration deepens. Energy is positioned at a geopolitical nexus: WTI crude near $66–67/bbl reflects the market balancing Iran-related supply uncertainty (US-Iran nuclear talks resume Thursday in Geneva) against the global demand deceleration implied by tariff-driven economic friction. A Brent breakout above $90 would introduce a meaningful additional inflationary shock into the current policy calculus.

Economic Data & Events

Today's Calendar

• 6:30AM MT - Durable Goods Orders - Moderate Impact
• 8:00AM MT - New Home Sales - High Impact
• 2:00PM MT - NVDA Earnings - High Impact