The markets were already on edge, and there seems to be little sign of that changing any time soon. Geopolitical tensions have reached fever pitch, culminating in an outright shouting match in the Oval Office in Washington. This development could have significant consequences, as Trump currently appears unwilling to provide aid to Ukraine.
As we have seen this week, such uncertainty creates opportunities for other surprises to make a major impact. In just a matter of hours, stagflation fears gripped investor sentiment completely.
Worrying signals
The chart below speaks for itself: the ISM Manufacturing New Orders Index plummeted in February, once again falling below the crucial 50 threshold. This level is often viewed as the dividing line between expansion and contraction, although in practice, the real cut-off tends to be slightly lower. However, any way you look at it, a reading of 48.6 is far from encouraging.
At the same time, the ISM Prices Paid Index surged to its highest level since June 2022. This development sends a clear message: those expecting inflationary pressures to ease are mistaken. Quite the opposite, in fact.
As if that were not enough, the Atlanta Fed’s GDP growth forecast saw an ‘unprecedented’ collapse. The projection shifted from robust growth to an expected contraction of nearly 3 percent. That was the tipping point—panic briefly took hold.
Lower growth, higher inflation—investors fear the worst
The combination of slowing economic growth and rising inflation is a nightmare scenario for many investors. It also neatly aligns with the—albeit incorrect—rhetoric surrounding import tariffs. The logic is straightforward: more expensive imports push prices higher and squeeze economic growth. The latter is certainly true, but whether prices actually rise depends on how businesses adjust to the tariffs.
Interestingly, bond and currency markets appear more concerned about a recession. Despite the spike in the ISM Prices Paid Index, yields fell sharply, and the dollar weakened against most major currencies.
But is it time to play the recession card just yet? I don’t think so. This week also revealed that personal income in the US rose more than expected. The most crucial indicator—income excluding government transfers—even accelerated. As long as the US labour market does not suddenly collapse—something economists have been predicting for years but has yet to happen—a recession does not seem imminent.
Moreover, any deterioration in economic momentum could prompt the Fed to cut rates more swiftly. Meanwhile, the Treasury Secretary is already hedging for a downturn. According to Bessent, the US economy is headed for a ‘rough patch,’ which, of course, would all be Biden’s fault. Naturally.
Inflation: the blind spot
What strikes me is how little attention inflation is receiving. And I have my doubts about that. Inflation remains too high globally and appears deeply entrenched. Any form of stimulus could reignite inflationary pressures. And just as Europe prepares to inject 800 billion euro into defence spending.
In that sense, investors are much like politicians: they struggle with balance.
Jeroen Blokland analyses striking, real-time financial market and macroeconomic charts in his newsletter The Market Routine. He is also the manager of the Blokland Smart Multi-Asset Fund, which invests in equities, gold, and bitcoin.