Wall Street traders drove stocks higher and bond yields lower as an unexpected decline in inflation reinforced bets the Federal Reserve will resume cutting interest rates in September.
Just a week ahead of the Fed decision, the first drop in producer prices in four months soothed worries that elevated inflation would create a challenge for policymakers trying prevent a jobs downturn. The market reaction was sharp, with traders almost fully pricing in three rate reductions in 2025.
The S&P 500 hit all-time highs, with tech leading the way. Oracle Corp. soared 40% on a solid cloud outlook and was set to vault past stocks like JPMorgan Chase & Co. to become the 10th most-valuable member in the benchmark. Two-year yields fell four basis points to 3.52%. The dollar slid.
The producer price index decreased 0.1% in August from a month earlier and July’s figure was revised down. From the year before, it rose 2.6%. Economists pay close attention to the PPI report as some components are used to calculate the Fed’s preferred measure of inflation.
“The worst-case scenario on inflation isn’t playing out,” said David Russell at TradeStation. “The doves will be happy to see the year-over-year number back below 3%. Combined with the weak jobs data recently, this keeps us on track for rate cuts. However the speed and intensity might depend more on the big consumer index tomorrow morning.”
The extent to which companies pass the burden from tariffs on to consumers will be key in shaping the path for interest rates. In fact, attention will soon shift to consumer price data due Thursday. Forecasters expect another elevated advance in the core measure which excludes food and energy.
“Tomorrow’s CPI will carry more weight, but today’s PPI print essentially rolled out the red carpet for a Fed rate cut next week,” said Chris Larkin at E*Trade from Morgan Stanley. “After last week’s jobs report, though, the market was already expecting the Fed to begin an easing cycle, so it remains to be seen how much of a near-term impact this will have on sentiment.”
The downside surprise to the PPI in August was driven by a compression of trade margins, reversing their unexpected widening in July, and therefore overstates the softness of producer prices, according to Stephen Brown at Capital Economics.
“Nonetheless, the big picture remains that tariff effects are feeding through only slowly,” he said.
To Neil Dutta at Renaissance Macro Research, firms may be trying to stay competitive to maintain market-share. At the end of the day, tariff related pass-through has not been as much as anticipated, he noted.
“I think the Fed should cut 50 basis points next week — but I don’t think they will,” Dutta noted. “The doves on the FOMC have a very strong case to make and we should anticipate dissents in the direction of a larger upfront move. The hawks will argue that the unemployment rate is still low, financial conditions are loose, and that there is still upward inflation pressure in front of us due to tariffs.”
The better-than-expected and relatively benign producer price report is both good news and bad news, according to Scott Helfstein at Global X.
“On the positive side, tariffs are not having a drastic impact on company supply chains in aggregate. Alternatively, the slowing in producer inflation could also signal a softening economy. The Fed is likely to take notice but will still likely deliver a modest rate cut in September,” he said.
“Nothing in today’s data should sway the Fed from cutting rates next week,” said Mark Streiber at FHN Financial. “Corporate profit margins surged after the pandemic, and were hovering near all-time highs before the tariffs were implemented. Tariffs have taken a bite out of those margins, but businesses certainly have the ability to absorb the blow, as seen by the lack of layoffs and tariff-cost absorption.”
If profit margins were tighter to begin with, Streiber noted, businesses likely would have shed employees already to save on costs.
Policymakers are largely expected to cut rates when they meet next week in an effort to counter a rapid slowdown in the labor market. Fed Chair Jerome Powell cautiously opened the door to a cut at the Fed’s Jackson Hole symposium last month, and more recent data showed the hiring slowdown extended into August.
Disappointing employment data released Friday validated fears that the US labor market may be on the brink of a downturn and lifted expectations for how much the Fed will lower interest rates this year.
“PPI data is good news for the Fed and marginally raises the probability of three sequential cuts in September, October and December,” said Marco Casiraghi and Krishna Guha at Evercore. “A few more inflation prints would not settle the question of whether the Fed should look through the tariff shock, but risks have already moved into better balance and Powell is sensitive to downside risks to the labor market.”
“Core PPI declines further provide cover for a more accommodative monetary policy,” said Eric Teal at Comerica Wealth Management. “The stagnant job market will take precedence as the Fed prepares to reduce rates and stimulate the economy; although we continue to believe the consumer is significantly less rate sensitive than in the past so more cuts are likely on the horizon.”
“The combination of a moderation in jobs growth and still manageable inflation should keep the Fed on track to cut rates, with a 25-basis-point cut expected in September to be followed by three additional consecutive cuts of the same size by January 2026,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.
Against this backdrop, she maintains her positive view on quality bonds and continue to favor medium duration Treasuries as part of a well-diversified portfolio. Falling rates should further support the rally in equities, with the S&P 500 expected to finish 2025 near 6,600 and reach 6,800 by end-June 2026.
Consumer price data due Thursday will offer insights on the extent to which tariffs made their way to American households in August. Core CPI, a measure of underlying inflation excluding food and fuel, probably rose 0.3% for a second month, according to the Bloomberg survey median estimate.
A survey conducted by 22V Research shows investors expect an in-line inflation report tomorrow, with most respondents saying core CPI is on a Fed-friendly glide path.
Options traders are betting the S&P 500 will post a modest swing of nearly 0.7% in either direction following the CPI report, according to Stuart Kaiser, Citigroup Inc.’s head of US equity trading strategy. That’s less than the average realized CPI day move of 0.9% over the past year, and below expectations for the next jobs report on Oct. 3. And Kaiser thinks the implied move is high.
Wall Street forecasters are rushing to boost their outlook for the S&P 500 amid prospects for Fed cuts, robust corporate earnings and renewed enthusiasm around artificial intelligence.
Deutsche Bank AG’s Binky Chadha raised his year-end target to 7,000, saying half the estimated direct impact of tariffs has already flowed through into inflation. JPMorgan Chase & Co.’s Dubravko Lakos-Bujas warned of risks in the short-term from inflation, but said the gauge could rally to about 7,000 points by early next year amid easing policy headwinds, lower rates and record payouts.
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