Markets Caught Between Cooling Inflation and Rising Trade Tensions

Markets React to Cooling Inflation, But Trade Risks Loom Large

Stock markets posted modest gains on Wednesday, with investors initially cheering softer U.S. inflation data before shifting focus back to the ongoing trade war. While the *February CPI report showed a weaker-than-expected increase of 0.2% MoM and 2.8% YoY, a closer look at subcomponents suggested potential upward pressure on the Fed’s preferred inflation measure, PCE, later in the week. This led to a reversal in early risk-on sentiment, with equities paring their initial gains and *fixed-income markets ending the session weaker.

•⁠ ⁠Dow Jones: 41,350.93 (-0.20%)
•⁠ ⁠S&P 500: 5,599.30 (+0.49%)
•⁠ ⁠Nasdaq: 17,648.45 (+1.22%)

*Bond markets were mixed, with the **10-year Treasury yield rising to 4.322%, while the *2-year yield climbed to 3.997%, reflecting concerns over persistent inflation risks despite softer headline numbers.

Meanwhile, Canada cut rates by *25bps to 2.75%, its seventh consecutive cut. Despite some labeling this as a “hawkish cut” due to inflation concerns from trade disruptions, the reality is that *tariffs pose a real threat to growth, business sentiment, and employment. Canada’s economy remains deeply linked to the U.S., and shifting away from American trade dependence is easier said than done.

The Trade War Escalates: Retaliation and Uncertainty

The latest chapter in the ongoing trade war saw Canada and the EU responding to U.S. tariffs on steel and aluminum with their own retaliatory measures.

•⁠ ⁠Canada imposed 25% tariffs on $20 billion worth of U.S. goods, effective Thursday.
•⁠ ⁠The EU announced matching tariffs on $26 billion of U.S. products.
•⁠ ⁠Trump vowed to escalate further, setting the stage for more uncertainty.

Markets have yet to fully price in the long-term impact of these trade restrictions. While inflation remains under control for now, supply chain disruptions could introduce price pressures over the coming months, complicating the Federal Reserve’s policy path. Investors should closely watch upcoming tariff developments, the FOMC meeting, and global trade negotiations as key market-moving events.

Stock Highlights: Tech Leads, Pharma Struggles

Winners:

•⁠ ⁠Nvidia (+6.43%) bounced back from its recent lows after reports surfaced about a joint venture with Intel and Taiwan Semiconductor.
•⁠ ⁠Tesla (+7.59%) rallied alongside a broader tech surge, though concerns remain about its 35% YTD decline.
•⁠ ⁠Groupon (+43.10%) soared after issuing strong revenue guidance that topped analyst expectations.

Losers:

•⁠ ⁠Apple (-1.75%) extended its slump after Morgan Stanley cut its price target, citing uncertainties around its AI strategy.
•⁠ ⁠Novo Nordisk (-4.25%) slid after Roche struck a $5.3 billion deal with Zealand Pharma to develop a competing weight-loss drug.

Looking Ahead: Key Risks and Market Drivers

While markets found support in softer inflation, trade risks, central bank policy, and economic data remain major headwinds. Looking forward, investors should watch:

•⁠ ⁠Eurozone Industrial Production data for signs of economic resilience.
•⁠ ⁠U.S. PPI and Jobless Claims for additional inflation signals.
•⁠ ⁠Developments in U.S.-EU trade relations, as Trump signals further action.

The remainder of 2025 is likely to be a bumpy road, with *tariffs, inflation trends, and monetary policy decisions driving volatility. Investors should remain agile, balancing risk exposure with a focus on defensive sectors like *healthcare, select consumer stocks, and energy, while closely monitoring tech for signs of sustained recovery.