Major U.S. stock indexes digested continuingly tame inflation data last week, and market bulls were on parade as participants look forward to this week’s Fed meeting.

In summary, last week the S&P 500 added 4.02%, the Nasdaq 100 increased by 5.93%, and the Dow Jones Industrial Average rose by 2.60%.

Softening Inflation Data

According to the most recent metrics released last week, inflation continued to cool in August.

The grandfather of inflation data, CPI, showed continued cooling in inflation on the consumer level. Data for August showed a monthly increase of 0.2%, which equaled a 2.5%  year-over-year inflation rate– the lowest since early 2021.

Core CPI, which includes food and energy, rose a tick above expectations, tacking on 0.3% for the month versus expectations for 0.2%.

The main culprit for the rise in the core was Shelter costs–accounting for 70% of the core increase–seeing monthly gains of 0.5% and an annualized increase of 5.2%. Used vehicles declined by 1%, while apparel pricing rose by 0.3%. And here we go again–egg prices rose 4.8% on the month.

CPI Market Reaction

Major U.S. stock indexes initially sold off upon the data release and fell throughout the day, as the report suggested to firm up expectations for a run-of-the-mill 25 basis point cut this Wednesday. Typically welcome news, the Dow briefly fell 743 points before mounting its biggest intraday comeback in almost two years.

Traders were busy handicapping hard versus soft landing probabilities and figuring out whether the Fed’s timing is right. Following the release of CPI data last Wednesday, traders priced in greater than 100 basis points of rate cuts over the final three Fed meetings this year. Positioning showed a 50-bp cut expected in November or December, with a 50% chance of seeing one this week.

The day after PPI data was released, Producer Pricing (wholesale pricing) showed a rise of 0.2% in August, matching Dow Jones estimates. Major stock indexes came into the data higher from the previous day’s CPI print and continued their upward journey,  having another positive day.

FedWatch

With market reaction to CPI and cousin PPI last week being equity-market-supportive, last week painted a Fed-friendly picture.

As of the close of last week’s trading, futures traders show a dead heat between a 25 basis point cut and a 50 basis point cut at this Wednesday’s Fed meeting, according to the CME FedWatch tool.

Gathering consensus elsewhere, opinions are divided; we will have to see what the Fed does, and some may think a 25 bp cut leaves something to be desired as far as timing. A 50 bp cut would certainly loosen up lending and spur activity.

Government Bond Yields Decline

As major stock indexes rose last week, government bond yields fell, indicating expectations for lower Fed overnight rates and a risk-on attitude. Ten-year note yields lost around six basis points to end the week near 3.651%.

Two-year notes lost around 6.6 basis points, closing the week near 3.584%. With tens outyielding twos again this week, the 2/10 yield curve “uninversion” or normalization continued for a second week.

The Week Ahead

We find ourselves further into election season as the markets eagerly anticipate rate cuts starting this week. Using CME FedWatch Tool as an indicator, opinions are split down the middle–something we are not used to being this close to a Fed meeting date.

CPI and PPI data are constructive in that the inflation battle has been fruitful and productive, but it is not quite over yet. However, last week’s data showed that CPI is getting closer and closer to the Fed’s 2% annual target annual inflation rate.

Thank you for reading!

The Trademark Capital® Team

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