US stock market was in a celebratory mood after the release of the US CPI data for July. On Tuesday, the S&P 500 gained 1.13%, the Nasdaq rose 1.39%, and the Dow added over 480 points to close the day 1.1% higher.
Markets are pricing in nearly a 94% probability of a rate cut at the Fed’s September meeting. According to Polymarket, the world’s largest prediction market, there’s a 80% probability for September rate cut.
The FOMC’s rate cut decision on September 16-17 meeting has not reached a 100% consensus yet.
July US CPI Data
July US CPI data showed headline inflation steady at 2.7% but core rising to 3.1%, driven by services. Some experts believe two straight months of higher inflation make a September Fed rate cut unlikely unless the labor market worsens sharply.
Others think weakening jobs data could still prompt a cut. However, there are at least two major data points arriving before the next FOMC meeting in September.
Markets await key September jobs and CPI reports, which may ultimately decide the Fed’s next move.
Expert Views
Larry Tentarelli, Chief Technical Strategist for Blue Chip Daily Trend Report says do not expect a September rate cut.
Today’s CPI report, in line with forecasts, but above the June 12-month data, puts the Fed is a predicament of trying to balance a possibly weakening labor market vs two months in a row of rising inflation and above average CPI.
The July payrolls report missed forecasts and the unemployment rate ticked higher – signs of a potentially weakening labor market. Meanwhile, 12-month CPI came in above the prior month for June and now for July.
While one data point does not make a trend, two consecutive months of higher 12-month inflation will make it difficult for the Fed to justify a rate cut at their September 17 meeting.
We remain bullish on the S&P 500 index into year end, but we do not expect a September rate cut unless the jobs market drops off drastically over the next 45 days.
If the Fed has to choose between shoring up the labor market or fighting inflation, we believe they will opt to backdrop the labor market.
Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management says as the battle continues over whether or not tariffs will lead to persistent inflation, this month’s report did nothing to convince anyone.
The headline YoY number held steady at 2.7%, but the core number rose slightly to 3.1%. Although the Fed supposedly focuses more on the core number than on the headline number, we don’t believe that this report will deter the Fed from cutting rates next month.
More importantly, there is one more jobs report (on September 9) and one more CPI report (on September 9) before the Fed meets again and those reports will take on even more importance as the Fed decides whether to cut rates to preemptively support the labor market or whether the inflation reports are concerning enough that they feel like they need to sit on their hands and wait.
In this environment stocks can continue to move higher and it is going to take a much larger inflation number – or other shock to the market – for a correction to commence. With many strategists expecting volatility in the months ahead, yet recommending that dips should be bought, it’s hard to envision a very large pullback absent an actual recession.
Bill Adams, Chief Economist for Comerica Bank says the report makes the Fed slightly less likely to cut in September, since July’s hotter-than-expected core inflation was from sticky service prices rather than tariff-affected goods.
Jobs data scheduled for release in early September will have more sway over the Fed’s next decision than this inflation report.
The Fed will likely see the July CPI report as a pebble on the scales against a rate cut in September.
July’s faster core inflation was largely driven by hot increases of core services prices. The Fed believes services prices are a better metric of inflation’s trend than goods prices, where they are expecting a temporary pickup in inflation from tariffs.
Tariffs have had limited effects on inflation so far. But since tariff rates are up one day, down the next, then up even more the day after, it is too early to say how large their effect on prices will ultimately be.
Some businesses are probably holding off on price increases while they wait to see where tariff rates settle out. But nobody goes into business to lose money, and companies will eventually pass on price increases one way or another.
For the interest rate outlook, the CPI report is an argument against a cut in September, but the jobs data to be released early next month will likely have a larger sway over the Fed’s next decision.
The Fed is getting different signals from payrolls growth, which have been anemic recently, and from the unemployment rate, which has held largely steady over the last year.
If the unemployment rate is stable or lower in the next release, that could keep the Fed on hold. On the other hand, if there’s a decline in payrolls or big downward revisions in the preliminary benchmark revisions (to be released September 9th), that could tip the scales toward a rate cut.
Jeffrey Roach, Chief Economist for LPL Financial says investors must come to grips with inflation above the Fed’s target amid a backdrop of slower growth, setting things up for stagflation-lite. Despite the increase in core inflation, we expect the Fed to cut rates next month as they pay closer attention to the weakening labor market.
David Russell, Global Head of Market Strategy at TradeStation, an online brokerage firm, says the US CPI numbers weren’t great, but it could have been worse.
Lower energy prices kept a lid on the worst of the price increases, but we still saw core CPI return above 3 percent.
Wall Street is breathing a sigh of relief, with September in play for a Fed rate cut. Wall Street is happy with this news today, but anxiety will likely continue as tariffs work their way through supply chains.