Stocks Cheer as Rate Cut Hopes Endure Despite Tariff Inflation
Stocks Cheer as Rate Cut Hopes Endure Despite Tariff Inflation
By:Ilya Spivak
Stock markets cheered as hopes for a Fed rate cut in September survived after key US inflation data.
- US CPI report left the markets to hope for a Fed rate cut next month
- Evidence showing tariff costs are boosting inflation continues to build
- Traders still see a more dovish path ahead than central bank officials
US consumer price index (CPI) data offered a mixed picture of inflation trends. Headline price growth stayed at 2.7% year-on-year in July, matching the four-month high recorded in the prior month. That undershot median forecasts ahead of the release calling for a rise to 2.8%.
However, the core CPI measure excluding volatile food and energy prices – a focal point for Federal Reserve officials since it focuses on the area of inflation where officials have agency while setting aside costs set on global markets – ticked up to 3.1% year-on-year. That topped expectations pointing to a print at 3.0% and marked a five-month high.
US inflation data shows tariff costs are creeping into prices
The report’s internals seemed to flag the kind of tariff-linked inflation that Fed officials have worried about since the Trump administration began to roll new levies early this year. While the service sector accounted for the lion’s share of price growth, the goods side of the ledger made its biggest contribution since June 2023.
In fact, the share from core services in the headline reading declined a bit from June to July, while the uplift from goods increased briskly for the second month. Moreover, core goods inflation accelerated to 1.09% year-on-year, the highest in 25 months. Services price growth quickened too, hitting the highest since December 2024 at 4.01%.
For their part, the markets seemed to reason that this data keeps the Fed on track to cut interest rates in September. Indeed, the move’s perceived likelihood has increased. Benchmark Fed Funds interest rate futures price in the probability of a 25-basis-point (bps) reduction at 94.4%, up from 85.9% yesterday.
Stock markets cheer as Fed rate cut bets hold up after CPI report
The overall outlook appears to be little-changed from where it stood before the CPI figures crossed the wires. Traders see 53bps in cuts this year and 67bps in 2026. That lines up with the Fed’s latest forecasting for 2025 – issued in June – but paints a far more dovish view thereafter. Central bank officials penciled in just one 25bps reduction for next year.
Wall Street was happy enough with that baseline to cheer the CPI result. The bellwether S&P 500 rose 1.07% while the tech-tilted Nasdaq 100 added 1.27%, hitting a record high. Producer price index (PPI) data is the next inflection point in this story. It has hinted that benign CPI is a bit of a mirage, as wholesalers absorb higher tariff costs into margins.
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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