S&P 500: 1.63% DOW: 0.98% NASDAQ: 2.03% 10-YR Yield: 4.07%
What Happened?
Not sure if markets are excited about football season or rather the high probability of a Federal Reserve rate cut next week, but optimism carried through from early September. All three major indices pushed to new highs: the S&P 500 gained 1.63%, the Dow rose 0.98%, and the Nasdaq led the pack with a 2.03% jump.
Interestingly, markets seemed to brush off what would normally be considered detrimental economic signals. Rising inflation? Higher jobless claims? Slipping consumer sentiment? Under typical circumstances, those data points might weigh heavily on investor sentiment. But this time, equities rallied.
The key driver: interest rate expectations. Markets are currently pricing in a 100% chance that the Fed will cut rates next week. And the drumbeat of “bad news” may actually increase the likelihood of not just a cut, but potentially a larger one than previously anticipated. In short, investors are betting that weak economic data strengthens the case for monetary easing.
Below, we’ll dive deeper into the latest CPI print, jobless claims, and what these U.S. data points could mean in the broader context of global competition.
US Stocks Advance as CPI Report Buoys Trader Bets on Rate Cuts
- The core consumer price index increased 0.3% from July, and the overall CPI rose 0.4%.
- US stocks climbed on Thursday, amid hopes that an in-line inflation report will push the Federal Reserve to cut interest rates next week.
The key takeaway – The Fed’s favorite inflation gauge, the CPI, rose 0.4% in August, the biggest monthly jump since the start of the year. On the surface, that’s not great news. Higher inflation usually spooks investors, since markets tend to price in what’s ahead, not what’s behind. And yet, equities pushed to fresh record highs this week. Why? Traders are betting hard that the Fed will finally pull the trigger on rate cuts at next week’s meeting.
Still, beneath the rally, worries are mounting. Inflation is climbing, the labor market is softening, and growth is slowing, a mix that’s raising the dreaded word: stagflation. August saw the largest monthly increase in jobless claims since early 2021, a clear signal that labor markets are under stress. Pair that with persistent inflation, and you’ve got a tricky backdrop.
The question now: if the Fed does cut, will it be enough to boost growth and restore confidence? Or will lower rates just fuel inflation while businesses and consumers remain cautious? The next few months will be critical in deciding which narrative wins out.
ECB Holds Rates Steady, Just as Fed Is Poised to Cut
- The European Central Bank held its key deposit rate at 2%, awaiting clarity on the impact of Trump’s tariffs on growth and inflation.
- The central bank lifted its growth forecast for this year to 1.2%, but nudged down its forecast for 2026 to 1%.
The key takeaway – After cutting rates eight times this year, the European Central Bank (ECB) is stepping back. For now, policymakers are holding steady, waiting to see how the Fed moves and what ripple effects follow across global markets.
The backdrop isn’t easy: the U.S. has slapped a 15% tariff on European trade, designed to “rebalance” flows and lock in U.S. energy and investment deals with the EU. While this secures commitments stateside, it raises costs for European exporters and threatens EU competitiveness. Earlier in 2025, the ECB cut rates aggressively to shield manufacturers and spur growth, but officials now fear further cuts could stoke inflation or weaken the euro.
Meanwhile, the Fed and ECB look like they’re running opposite plays. If the Fed cuts rates, the dollar could strengthen as inflation heats up, making European exports even more expensive abroad. That risk is precisely why the ECB is keeping its powder dry.
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