Introduction to the Market
Good morning, investors. It’s CPI day, and this morning will deliver a key input for the Federal Reserve’s September rate cut decision. The July inflation report could give the Fed another reason to keep delaying rate cuts, but investors don’t seem to care. Wall Street has shrugged off a conflicting macro backdrop for months. While central bankers have cautioned that sticky, tariff-driven inflation could still postpone rate cuts, investors are nonetheless positioning for smooth economic sailing and higher asset prices.
Expectations for CPI
Economists see headline and core CPI rising to 2.8% and 3.0% year-over-year, respectively, each up about a tenth of a point from June. That would mark the second straight monthly acceleration in core prices, driven largely by tariff pass-through in goods across autos, apparel and AI-linked products, according to Morgan Stanley. The prevailing soft-landing narrative has remained remarkably durable all year, and it’s likely to stay intact with cash levels historically low and stocks trading at record highs.
Impact on the Market
Markets are overwhelmingly betting on a rate cut in September, with CME data showing 86.5% odds for a quarter-point move lower. Traders on the prediction platform Kalshi similarly see 76% probability for a cut. Yet a hotter-than-expected inflation report would challenge that consensus, according to Morgan Stanley, particularly if the three-month annualized rate of core CPI materially rises. Jay Woods, chief global strategist for Freedom Capital Markets, noted that a hot print “could also cause recessionary and stagflation talk to grow louder.”
Investor Positioning
Bank of America’s August Global Fund Manager Survey showed cash allocations hover at 3.9% — near historic lows — while equity allocations are near their highest since February.
- 7 in 10 investors expect a soft-landing
- Just 5% are positioned for a recession
- 91% of respondents say US equities are overvalued, but investors keep buying stocks anyway
Recent News
President Trump extended the China tariff deadline. He signed an executive order that will prevent levies hitting Chinese goods for another 90 days. Nvidia is willing to pay the US government $3B to save its China business. The chipmaker has cut an unprecedented deal with the White House to share China revenue to resume sales of its H20 chips, with AMD firming up a similar arrangement. Gold will not face tariffs, according to Trump.
Additional Updates
- President Trump’s Fed nominee Miran could be the first domino in a sequence leading to looser policy
- Trump said he initially asked Nvidia for a 20% cut of sales before settling on 15%
- Intel stock climbed as Trump singled out its CEO to visit the White House
- Crypto stocks like Coinbase and Strategy rallied Monday as bitcoin hovered near a record high
- The crypto exchange Bullish raised its IPO size to target a $4.2 billion valuation
- A new generation of “buy the dip” retail investors have propped up the market
- Ford announced a $2 billion investment in Louisville to build cheap EVs
- Bitcoin is signaling that stocks aren’t overvalued
Conclusion
It would likely take a loud and unambiguous shift in the data — one that leaves the Fed no choice but to delay rate cuts — to break that momentum. “While markets are treating a September cut as a near certainty, we think there is still a lot to play for,” Carpenter said. If the latest CPI print lands in line or cooler than forecasts, it could catalyze the next leg higher in risk assets. That said, even a hot inflation report isn’t guaranteed to derail the bull run.
