Markets Bet 90% on September Rate Cut as Fed Faces Inflation-Labor Split
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Macro Economics: U.S. inflation held steady at 2.7% in July compared with a year earlier, as falling grocery and gasoline prices helped offset other increases. However, “core” CPI, which excludes volatile food and energy prices, accelerated to 3.1% year over year, the fastest pace since February, and economists expect it to rise further to 3.8% by year-end. Analysts attribute much of the underlying pressure to Trump administration tariffs and immigration policies, which are beginning to push up prices for goods like household furnishings and apparel, as well as services that rely heavily on immigrant labor. While the immediate impact is modest, economists warn the effects will build over the coming months as businesses gradually pass on higher costs to consumers.
Goods inflation, typically flat or negative, is now climbing, with core goods up 1.2% annually, the fastest in over two years. Tariff-related price gains are most evident in household furnishings, toys, and apparel, while services like haircuts and pet care are seeing higher labor costs due to reduced immigrant labor supply. Some officials, including White House economic advisers, dispute that tariffs are driving consumer prices higher, noting that many businesses are still selling pre-tariff inventory. Economists counter that the lag in price adjustments means the full effect of these policies will likely not be felt until later this year.
Equities: US stocks climbed on Tuesday as investors weighed fresh inflation data and news that President Trump nominated E.J. Antoni, chief economist at the Heritage Foundation, to lead the Bureau of Labor Statistics. The Dow rose about 1%, the S&P 500 gained 0.8%, and the Nasdaq added around 1%, pushing toward new records. July’s Consumer Price Index showed core inflation rising 3.1% year over year, up from June’s 2.9%, while headline CPI held steady at 2.7%, slightly below forecasts. The data boosted expectations for a Federal Reserve rate cut in September, with CME Group data showing 94% of traders anticipating the move.
In corporate and policy developments, Intel shares rose over 1% after CEO Lip-Bu Tan met with Trump, despite the president having called for his resignation last week. Meanwhile, reports surfaced that China instructed local firms not to use Nvidia H20 chips, complicating U.S. trade ambitions. Trump also extended a 90-day pause on certain tariffs against China as trade negotiations continue, and investors now look ahead to Thursday’s Producer Price Index and Friday’s retail sales report for further economic signals.The Fed and US Treasury: US short-term debt yields slipped Tuesday after July’s inflation data largely met expectations, bolstering bets that the Federal Reserve will cut rates in September. The two-year yield fell three basis points as markets priced in nearly a 90% chance of a September 17 cut, up from 80% before the release. Headline CPI held at 2.7% year over year, while core CPI rose to 3.1%, the highest since February and slightly above forecasts. While longer-term yields reversed early declines amid higher UK and eurozone yields, analysts said markets had braced for a hotter print that might have slowed easing plans. With the Fed increasingly focused on labor market weakness after July’s soft jobs report, some see a potential 50-basis-point move, though 25 remains the base case.
Fed officials are divided on the path forward. Kansas City Fed President Jeff Schmid and Richmond Fed President Tom Barkin urged caution to avoid fueling inflation, while Governors Christopher Waller and Michelle Bowman dissented at the last meeting in favor of easing over job market concerns. President Trump renewed his criticism of Chair Jerome Powell for not cutting sooner, even suggesting legal action, while markets positioned for possible larger moves through options activity. The Fed will review August jobs data before deciding, and Powell’s remarks at next week’s Jackson Hole symposium are expected to clarify whether labor market risks now outweigh inflation concerns in shaping near-term policy.
Geopolitical: Ukraine has warned that Russia is preparing new offensives, not peace, ahead of talks between Presidents Trump and Putin in Alaska, talks from which Kyiv and European leaders have been excluded. President Zelenskyy said intelligence indicates Moscow is moving troops and planning further attacks, accusing Putin of seeking only to stage a meeting with Trump as a political win while continuing the war. European officials, including EU foreign policy chief Kaja Kallas, echoed the skepticism, saying Putin is “pretending to negotiate” to delay sanctions and extract concessions without involving Ukraine. Kyiv has insisted no deal on its future can be struck without its participation, and German Chancellor Friedrich Merz has called an emergency meeting with Trump, Zelenskyy, and European leaders to coordinate strategy.
Trump has described the Putin meeting as a “feel-out” session, hinting at possible land swaps but claiming he will consult European and NATO leaders, as well as Zelenskyy, before making any commitments. Analysts widely doubt the talks will produce a lasting peace, seeing them instead as a U.S. attempt to gauge room for compromise on limited issues. Some warn Moscow could offer partial de-escalation to give Trump a symbolic diplomatic win while pressuring Ukraine into territorial concessions, a move Kyiv has already rejected. Without Ukraine and Europe at the table, experts caution that any agreement risks being seen as illegitimate and could deepen divisions among allies.
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Markets Weigh Softer CPI Against Fed’s Divided Stance
July’s inflation readings landed almost exactly where markets wanted them, with headline CPI holding at 2.7% and core ticking up to 3.1%. This removed the risk of an upside surprise that could have stalled rate cut bets. Short-term yields eased, with traders now pricing in a near 90% probability of a September cut. The real driver of policy expectations, however, is not the CPI print itself but the deteriorating jobs picture. July payroll growth collapsed to just 73,000 with steep downward revisions, pulling the three-month average to a paltry 35,000. That labor market softness is shifting the Fed’s focus from inflation control to economic support, even as policymakers remain split on whether to act decisively or tread carefully. Powell’s upcoming Jackson Hole speech will be the next inflection point for guidance. Looking ahead, any signal from Powell that labor market weakness outweighs inflation risk could anchor expectations for multiple cuts into early 2025 and push yields lower in the near term.
Equities Push Higher, Eyes on Policy Path
U.S. stocks advanced as markets digested the inflation data and braced for further signals from the Fed. The S&P 500 and Nasdaq gained close to 1%, buoyed by rising odds of easier policy in the fall. While the inflation numbers give cover for at least one rate cut this year, the divergence among Fed officials, from hawks like Jeff Schmid warning against premature easing to doves like Mary Daly calling for quicker action, reflects the fine balance between restraining inflation and supporting employment. This policy uncertainty is becoming a market driver in its own right, with rate-sensitive sectors reacting quickly to shifting odds. Traders are watching August labor data closely, as any further deterioration could lock in a September cut and potentially open the door to a larger-than-expected move. Forward, we expect equities to maintain an upward bias into the September meeting. However, any hawkish shift in tone from Jackson Hole could trigger short-term profit taking, particularly in rate-sensitive growth names.
Geopolitical Risk Watch: Ukraine Sidelined from U.S.-Russia Talks
On the geopolitical front, Friday’s planned meeting between Presidents Trump and Putin has introduced a fresh layer of uncertainty. Ukraine and European leaders have been excluded, prompting warnings from President Zelenskyy and EU officials that Moscow is positioning for more offensives while using the talks to delay sanctions and seek concessions. Even a symbolic de-escalation could be leveraged by the Kremlin to pressure Kyiv into territorial compromises it has already rejected. For markets, the risk is less about an immediate resolution to the conflict and more about the durability of Western unity on sanctions and aid, which influence energy prices, defense spending trajectories, and investor sentiment toward European assets. The optics of this meeting, regardless of substance, may embolden Moscow and inject volatility into already fragile geopolitical risk pricing. In the weeks ahead, we will be watching for any post-meeting announcements that could alter the sanctions landscape or shift investor expectations around European stability, both of which could drive sharp moves in energy and currency markets.
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The 1Konto Team
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