Stocks at Record Highs: Will Consumers Ruin Rate Cuts for the Markets?
Stocks at Record Highs: Will Consumers Ruin Rate Cuts for the Markets?
By:Ilya Spivak
The markets’ rate cut frenzy may be challenged by US consumers
- Wall Street cheered with approval as US CPI data passed without incident
- Traders are sure that a Fed rate will arrive at this month’s FOMC meeting
- Consumer confidence data may cast doubt on how dovish the Fed can get
Stock markets roared higher as traders breathed a sigh of relief after US consumer price index (CPI) data passed without upsetting Federal Reserve interest rate cut expectations. The spotlight now turns to a gauge of US consumer confidence of a test of sentiment’s resilience ahead of next week’s much-anticipated monetary policy announcement.
The bellwether S&P 500 stock index jumped 0.81%, hitting a hew record high. The tech-tilted Nasdaq 100 added 0.59% but remained pinned under the high set in mid-August. Treasury bonds rallied as yields fell alongside the US dollar. The currency fell 0.4% against an average of its major counterparts.
The CPI report landed squarely in line with expectations. The headline inflation rate rose to 2.9% year-on-year, marking a seven-month high. The core CPI gauge excluding volatile food and energy prices held at 3.1% year-on-year, matching the five-month high recorded in July.
The markets are sure about September’s Fed rate cut after US CPI data
While most inflation remained on the services side of the ledger, goods prices ticked higher for a third consecutive month. Moreover, August’s monthly rise of 0.28% was the largest increase since January. In trend terms, core goods price growth has accelerated to 1.49% year-on-year, the highest since May 2023.
The markets seemed unfazed by this apparent display of tariff-linked inflation, at least for now. Benchmark Fed Funds interest rate futures show that the probability of a 25-basis-point (bps) rate cut at next week’s meeting of the policy-steering Federal Open Market Committee (FOMC) remains overwhelming at 92.7%.
From here, the object of speculation is likely to be the growing disconnect between traders and central bank officials about what will happen after this month’s move. Policymakers have owned up to just 75bps in rate cuts from now through the end of 2026, with 50bps on the menu for this year and just 25bps penciled for the next.
By contrast, traders are now betting on 65bps for 2025, implying at least two cuts and better-than-even odds of a third one, followed by three cuts after the calendar turn. Traders will look for the Fed to make a move toward their side of the argument with next week’s quarterly update of the Summary of Economic Projections (SEP).
Will consumers challenge the Fed’s tariff inflation pledge?
With that in mind, the spotlight turns to US consumer confidence data from the University of Michigan (UofM). September’s survey is expected to show that sentiment cooled for a second consecutive month, producing the lowest reading since May. It is respondents’ inflation expectations that might be of greatest interest, however.
Last month’s sentiment drop marked a reversal from a five-month high against the backdrop of a rise in survey takers’ one-year inflation outlook. It rose for the first time in four months, from 4.5% to 4.8%. Clues sprinkled in the CPI report as well as PPI data earlier in the week hint that another rise is plausible as tariff costs become easier to spot.
The Fed has loudly promised to keep tariff-linked inflation to a one-off and prevent it from entrenching in expectations. Signs of a challenge to this pledge in the UofM report might make it hard for the central bank to follow the markets’ dovish lead beyond this month.
For their part, traders probably need little more than the risk of a let-down from FOMC forecasting next week to consider backpedaling on some of this week’s exuberant rate-cuts-flavored price action. That could force stock markets back off their highs. It might also offer a lifeline to the US dollar.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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