Wall Street Cheers Signs Fed-Rate Cut a Done Deal: Markets Wrap

(Bloomberg) — A relatively tame inflation reading combined with more signs of jobs cooling spurred a rally on Wall Street amid speculation the Federal Reserve will slash interest rates for the first time this year.

The highly anticipated consumer price index showed that while inflation is still above the Fed’s 2% target, it’s not spinning out of control. Alongside that report came the usually noisy jobless claims figures, which jumped to the highest in almost four years, emboldening bets policymakers will cut rates next week in an effort to counter a rapid slowdown in the labor market.

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That was enough to spur a rally in Treasuries, with the 10-year yield briefly breaching 4%. And that’s even as European bonds underperformed on bets the euro-zone easing cycle is over. In a broad advance, the S&P 500 hit a fresh record. The Dow Jones Industrial Average topped 46,000. Small caps jumped. Gold eclipsed its inflation-adjusted peak set in 1980.

“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 basis points next week and to follow through with another two 25 basis-point cuts this year.”

A slowing jobs market has prompted markets 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. 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.

“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.”

“The claims data were arguably the bigger news,” said Tiffany Wilding at Pacific Investment Management Co. “We still expect the Fed to cut 25 bps next week, though 50 will likely be discussed. We continue to look for 75 bps of total cuts this year.”

For the first time in a long time, CPI is being overshadowed on its release day by initial jobless claims, noted Josh Jamner at ClearBridge Investments.

This dynamic illustrates the Fed’s focus on the “maximum employment” half of the Fed’s dual mandate, with today’s inflation print not hot enough to derail a 25 basis-point rate cut next week, he said.

“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 among Fed Chair contenders about the need for a 50 basis-point cut, an emergency-sized 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 the US 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.”

While Fed officials are widely expected to cut interest rates next week after a series of weak employment data, firm inflation — if sustained — may complicate the path for additional reductions at subsequent meetings.

To Chris Zaccarelli at Northlight Asset Management, it’s surprising to see how quickly the narrative has shifted. Whereas before last week’s jobs report the question was whether or not there would be a cut in September, now traders are speculating how many cuts we will see following the first reduction.

“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,” he said.

The core consumer price index, excluding the often volatile food and energy categories, increased 0.3% from July. When incorporating those components, the overall CPI rose 0.4%, the most since the start of the year. Meantime initial jobless claims rose by 27,000 to 263,000 in the week ended Sept. 6, the highest since October 2021.

“The labor market is cracking; however, the inflation data are a reminder that a large upfront move is unlikely,” said Neil Dutta at Renaissance Macro Research. “The Fed is only likely to deliver a 25bp move. That is what I think the Fed will do, not what I think they should do.”

At Bankrate, Stephen Kates says concerns over “stagflation” are likely to intensify as the Fed weighs its next move.

“The Fed’s dual mandate of stable prices and full employment remains firmly at odds, limiting their policy flexibility in 2025. Even if the committee decides to cut rates, it will likely reflect a surrender to economic weakness rather than a clear win over inflation,” he noted.

“Upside surprises on both US inflation and firings have stagflationary undertones,” said Don Rissmiller at Strategas. “But neither trend looks entrenched yet here.”

To 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,” Kerschner said. “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.”

For now, policymakers appear to be more concerned about the near-term impact of not easing, signaling that the risk to the labor economy – and overall economic momentum – presents the greater near-term risk, according to Jim Baird at Plante Moran Financial Advisors.

“It’s that perception that is expected to drive the Fed to trim its policy rate next week. The bigger question is ‘what next?’ Jay Powell’s press conference and the release of updated FOMC projections should go a long way toward providing an answer,” he said.

Bond investors are also interested in whether a decision to cut rates next week is unanimous. In July, two Fed governors — Christopher Waller and Michelle Bowman — dissented the decision to keep rates unchanged in favor of lowering them, and Waller has since has since said he favors “multiple cuts” in the coming months.

While Thursday’s economic data had little impact on market-implied expectations for next week’s Fed decision, traders priced in a steeper downward path for the federal funds rate in subsequent months.

To Krishna Guha at Evercore, the lastest inflation data support a Fed outlook for three successive cuts in September, October and December to recalibrate rates in a timely manner back down to roughly spot neutral by the end of the year. That should also help some Fed officials who have been on the fence to signal this in their submission for the September Summary of Economic Projections.

“Overall, we think the inflation trajectory is still moderately higher for a time, but the intermediate-term trend in inflation is generally moderating, especially in key areas such as services and shelter,” said Rick Rieder at BlackRock. “We believe that the Federal Reserve’s forward focus (maybe for the next few years) is likely to be achieving maximum employment – even if the economy does well in aggregate.”

‘Not an Aggressive Pivot’

Rieder says his preference is still owning duration in the front-to-belly of the yield curve, as correlations and fixed income’s hedge effectiveness have improved at the margins here. While the back end of the curve has been less reliable, and at times more erratic, at this point some exposure to the longer end makes sense as rates decline, he added.

“The Fed may still cut, but this data argues for a gradual path, not an aggressive pivot,” said Gina Bolvin at Bolvin Wealth Management Group. “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.”

Veteran market strategist Ed Yardeni raised his year-end forecast for the S&P 500 to 6,800 from a previous target of 6,600 as his base case, while assigning a 25% probability that the US stock benchmark could experience a “meltup” to 7,000 by 2025’s close.

“If the Fed lowers the federal funds rate on September 17 and signals more rate cuts ahead, we will increase our odds of a meltup and decrease our odds of a correction,” he wrote in a note to clients.

Corporate Highlights:

Paramount Skydance Corp., the Hollywood studio taken over in August by independent filmmaker David Ellison, is preparing a bid for rival Warner Bros. Discovery Inc., according to people with knowledge of the matter Boeing Co. said it’s falling behind schedule to get its 777X aircraft certified with regulators next year, risking another delay on a program that’s already years behind its original timeline. The Trump administration and Nvidia Corp. “settled on 15%” commission on the company’s H20 chip sales to China, Commerce Secretary Howard Lutnick told CNBC. Micron Technology Inc. climbed as analysts touted the chipmaker’s growth potential in the data center market, where artificial-intelligence services have stoked demand. The Federal Trade Commission ordered Alphabet Inc.’s Google, OpenAI Inc., Meta Platforms Inc. and four other makers of artificial intelligence chatbots to turn over information about the impacts of their technologies on kids. Delta Air Lines Inc. and American Airlines Group Inc. said they are dramatically expanding their premium offerings, underscoring the challenges US carriers face filling economy-class cabins after a plunge in demand earlier in the year. Kroger Co. raised its full-year sales forecast on food spending that’s remained stable even as consumers seek out bargains. Federal National Mortgage Association and Federal Home Loan Mortgage Corp. received their first buy recommendation from Wall Street on Thursday, as Deutsche Bank said the stocks’ dizzying rally can go further on expectations the mortgage giants will possibly be released from government control in the near future. 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. Centene Corp. jumped as the insurer gave upbeat views of its Medicare quality ratings and costs in its Medicaid business, positive signs for the company’s turnaround. Opendoor Technologies Inc. shares surged after announcing the return of its co-founders to the board and a new 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. Figure Technology Solutions Inc. opened above its IPO price after a listing raising $787.5 million. The blockchain-based credit company joins a cohort of crypto firms in embracing public markets. LB Pharmaceuticals Inc. jumped in its trading debut after the biotech raised $285 million in an upsized initial public offering. Indian software services giant Infosys Ltd. will buy back as much as 180 billion Indian rupees ($2 billion) worth of shares in an effort to return cash to investors amid a stock-price decline. 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. Discovery Ltd. plans to expand the roll out of its new artificial intelligence tool — already in use in South Africa and the UK — to clients across its Vitality Network, including in Europe and North America, as it seeks to double its operating income by 2029. Some of the main moves in markets:

Stocks

The S&P 500 rose 0.8% as of 3:28 p.m. New York time The Nasdaq 100 rose 0.7% The Dow Jones Industrial Average rose 1.3% The MSCI World Index rose 0.8% Bloomberg Magnificent 7 Total Return Index rose 1.2% The Russell 2000 Index rose 1.6% Currencies

The Bloomberg Dollar Spot Index fell 0.3% The euro rose 0.4% to $1.1737 The British pound rose 0.4% to $1.3579 The Japanese yen rose 0.2% to 147.13 per dollar Cryptocurrencies

Bitcoin rose 0.7% to $114,379.92 Ether rose 2.2% to $4,425.37 Bonds

The yield on 10-year Treasuries declined four basis points to 4.01% Germany’s 10-year yield was little changed at 2.66% Britain’s 10-year yield declined three basis points to 4.61% The yield on 2-year Treasuries declined two basis points to 3.53% The yield on 30-year Treasuries declined five basis points to 4.64% Commodities

West Texas Intermediate crude fell 2.2% to $62.28 a barrel Spot gold fell 0.2% to $3,635.19 an ounce ©2025 Bloomberg L.P.