(Bloomberg) -- A relatively tame inflation reading combined with more signs of jobs cooling spurred a rally in bonds on speculation that the Federal Reserve will cut interest rates for the first time this year.
Treasuries climbed across the curve, driving two-year yields down three basis points to 3.51%. Money markets almost fully priced in three Fed reductions by the end of 2025, starting next week. Gains in equities drove the S&P 500 to fresh all-time highs. European yields rose after the central bank signaled growth risks are more balanced, indicating the rate-cut cycle is over.
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The core consumer price index, excluding the often volatile food and energy categories, increased 0.3% from July, according to Bureau of Labor Statistics data out Thursday. On an annual basis, it advanced 3.1%. Separate data showed US initial jobless claims jump to the highest in almost four years.
"It's clear that inflation is relatively calm, which gives the Fed the flexibility to focus more on stemming ongoing weakness in the labor market," said Skyler Weinand at Regan Capital. "We expect the Fed to cut 25 by basis points next week and to follow through with another two 25 basis point cuts this year."
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.
A slowing jobs market has prompted Wall Street to price a more aggressive trajectory of rate cuts, with a growing number of economists now seeing a quarter-point rate cut at each of this year's three remaining meetings, from a previous forecast of just two cuts. Between now and this time next year, traders expect the Fed to deliver at least five 25 basis-point cuts.
"Right now, inflation is a key subplot, but the labor market is still the main story," said Ellen Zentner at Morgan Stanley Wealth Management. "Today's CPI may appear to offset yesterday's PPI, but it wasn't hot enough to distract the Fed from the softening jobs picture. That translates into a rate cut next week — and, likely, more to come."
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"Today's CPI report has been trumped by the jobless claims report," said Seema Shah at Principal Asset Management. "If anything, the jump in jobless claims will inject a bit more urgency in the Fed's decision making, with Powell likely signaling a sequence of rate cuts is on the way."
While there may be some murmurs within the Fed and particularly amongst Fed Chair contenders about the need for a 50 basis-point cut, an emergency sized rate reduction is not required, Shah noted. Jobless claims have jumped but are still quite low compared to 2021 levels, while the broader economic activity data and earnings reports do not signal an economy that is approaching a recessionary tipping point.
"The weaker the labor market gets, the less inflation matters," said David Russell at TradeStation. "It's a balancing act, and the scales are tipping more toward full employment versus price stability. That's especially true after this week's big downward revisions of the annual employment and last week's poor non-farm payrolls report."
"The last bolt on the gate has fallen out and the rate cutting horse is about to leave the barn," said Chris Zaccarelli at Northlight Asset Management. "It's surprising to see how quickly the narrative has shifted from before last week's jobs report from whether or not there will be a cut in September, to how many cuts we will see after there is definitely a cut in September."
Zaccarelli notes that the Fed's path is clear in the short run, but over the medium term the fact that core inflation is running quite a bit higher on a month-over-month basis is going to complicate matters and the market knows this.
More Comments:
Art Hogan at B. Riley Wealth:
This in-line CPI report confirms our view that the FOMC will cut rates by at least 25 basis points next week. While there is a small chance that the Fed could cut by 50 basis points, and there may well be some dissenters leaning in that direction. The real news of the day sits with the hotter-than-expected weekly jobless claims at 263,000, the highest level since Oct. 23, 2021. The Fed's full employment mandate is now front and center.
John Kerschner at Janus Henderson Investors:
The Fed has now clearly painted itself into a corner. Chair Powell is vowing to fight the ever obvious slowdown in the labor market with rate cuts, while at the same time ignoring the other half of its dual mandate - stable prices, or more specifically, 2% inflation. Core CPI has now been materially above the Fed's 2% target for 4.5 years, with the trend actually higher from here.
We do not believe that the 2% target will be reached for at least several more years barring a recession, which, while always possible with external shocks, is not even close to our baseline forecast.
Eric Teal at Comerica Wealth Management:
The inflation numbers are still running above the Fed's 2% target but looking at both PPI and CPI the numbers appear contained for the time being. This bullish steepening of the yield curve is a key feature of the economic environment and bodes well to blunt any economic slowdown and benefit smaller companies and everyday consumer activity.
Eugenio Aleman at Raymond James:
Headline inflation was higher than expected in August. This larger than expected increase is not good news for the Federal Reserve. We still believe that the Fed is going to lower rates by 25 bps in September
But markets may dial down their expectations for almost three rate cuts this year to just two unless Fed officials believe that the economy is heading into a recession if they don't act more forcefully in September, the possibility of a 50 bps cut in September may be off the table.
Josh Jamner at ClearBridge Investments:
For the first time in a long time, CPI is being overshadowed on its release day by another data series: initial jobless claims. A spike in initial jobless claims to the highest level in 4 years helped briefly push the 10-year Treasury below 4% this morning, despite a larger than expected increase in the consumer price index.
This dynamic illustrates the Fed's focus on the "maximum employment" half of the dual mandate, with today's inflation print not hot enough in our view to derail a 25 bps interest rate cut at next week's FOMC meeting.
While investors may cheer the prospect of rate cuts, if the pickup in initial jobless claims is sustained in the coming weeks, they may turn more cautious on the economic outlook.
Scott Helfstein at Global X:
Much of this year, Chair Powell has noted that risks to price stability and full employment were equally balanced. After the meaningful jobs revision last week, many believe that the risks to full employment now outweigh the risks to prices. The Fed probably sees that as well, but today's inflation report likely means a modest 25 point decrease rather than a larger cut.
Bret Kenwell at eToro:
This week's PPI results came in well below economists' expectations, giving investors hope that recent inflation increases will be short-lived. While today's CPI report didn't give that same reassurance, its mostly in-line nature should keep the Fed on path to cut rates at its next meetings.
Jeffrey Roach at LPL Financial:
In today's numbers, we are seeing some impact from tariffs, especially with higher prices on cars and clothes. A sticky category not as connected to trade is insurance which we expect to weigh on inflation for the next few months. The hot inflation print will not likely change the Fed's plan to cut rates in September, but it's possible the Fed will hold in October if inflation expectations no longer look well-contained.
Stephen Brown at Capital Economics:
Despite a slightly firmer gain in the core CPI in August amid broad increases in goods, services and shelter prices, there was not much for the FOMC to fret about, with our estimates pointing to a target-consistent 0.18% m/m gain in the core PCE deflator last month. That cements the case for a 25bp cut next week, rather than providing any support for a larger 50bp move.
Gina Bolvin at Bolvin Wealth Management Group:
August's CPI print shows inflation is still hanging around. The Fed may still cut, but this data argues for a gradual path, not an aggressive pivot.
For investors, it's about staying focused on long-term fundamentals, not short-term noise. The AI optimism may continue to drown out the inflation noise and equity investors will continue to be rewarded long term.
Corporate Highlights:
- Kroger Co. raised its full-year sales forecast, illustrating that the grocer is attracting value-seeking consumers who are opting to eat at home.
- Citigroup Inc.'s chief executive officer said merger activity is rebounding as US companies gain confidence from clearer policy signals, with a recession in the world's largest economy looking unlikely.
- Bank of New York Mellon Corp. said it's teamed up with Carnegie Mellon University to advance research into AI, including the use of the technology in applications that power financial services.
- Opendoor Technologies Inc. said co-founders Keith Rabois and Eric Wu will rejoin the board and named Shopify's Kaz Nejatian as chief executive officer.
- Oxford Industries Inc., the owner of the Tommy Bahama apparel brand, maintained its annual earnings outlook, despite anticipating a higher tariff hit. In addition, analysts were encouraged by quarter-to-date comparable sales commentary.
- Deutsche Bank sees shares of Federal National Mortgage Association and Federal Home Loan Mortgage Corp. gaining further on expectations the mortgage giants will possibly be released from government control in the near future.
- Iberdrola SA agreed to buy an additional 30% stake in Brazilian power distributor Neoenergia SA for about 12 billion reais ($2.2 billion) as it looks to increase investments in electricity networks.
- Novo Nordisk A/S's new chief executive officer is calling workers back to the office as the Ozempic maker struggles to catch up with Eli Lilly & Co. in the hyper-competitive obesity market.
- Nebius Group NV raised about $3.75 billion through selling convertible notes and stock as the firm looks to buy more land and computing resources following a massive contract with Microsoft Corp.
- Discovery Ltd.'s annual profit rose 30% to a record, paced by a jump in its South African health-insurance businesses and its Vitality franchise that benefitted from folding the global wellness program into a single business.
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.3% as of 9:30 a.m. New York time
- The Nasdaq 100 was little changed
- The Dow Jones Industrial Average rose 0.2%
- The Stoxx Europe 600 rose 0.2%
The MSCI World Index was little changed
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro rose 0.2% to $1.1724
- The British pound rose 0.1% to $1.3543
The Japanese yen was little changed at 147.51 per dollar
Cryptocurrencies
- Bitcoin rose 0.1% to $113,778.51
Ether rose 1.8% to $4,410.14
Bonds
- The yield on 10-year Treasuries declined two basis points to 4.02%
- Germany's 10-year yield advanced two basis points to 2.68%
- Britain's 10-year yield was little changed at 4.63%
- The yield on 2-year Treasuries declined three basis points to 3.51%
The yield on 30-year Treasuries declined two basis points to 4.68%
Commodities
- West Texas Intermediate crude fell 2% to $62.40 a barrel
Spot gold fell 0.5% to $3,623.03 an ounce
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