Wall Street’s Tug of War: Inflation, The Fed, and Market Reactions

Stocks Meandering while Treasuries Cool Off

So, here we go! Treasuries trimmed their earlier gains, and U.S. stocks just couldn’t make up their minds. The latest inflation data barely nudged the Federal Reserve’s game plan. The S&P 500 wavered, and the Nasdaq 100 saw a slight dip. Meanwhile, yields across the bond spectrum were lower, with the 10-year rate hanging around 3.77%. The dollar? Yeah, it took a little nosedive.

Livin’ in the Data Lane

Hold on to your coffee folks! The Fed’s go-to gauge for underlying U.S. inflation just ticked up in August. Oh, and let’s not forget about inflation-adjusted consumer spending; that went up too. Essentially, the data screams, "Hey, economy’s cooling off!” This only fuels the belief that Jerome Powell and the Fed will continue their rate-cut spree.

But wait, traders also got a scoop on U.S. consumer sentiment on Friday. Surprise, surprise, it hit a five-month high after the Fed dipped those borrowing costs. Market expectations? They’re split down the middle, guessing a toss-up between a quarter-point and half-point cut at the Fed’s next meeting. Now, economists foresee inflation hitting that magical 2% target next year. Source.

The Experts Weigh In

Chris Larkin from E*Trade chimed in, “Add today’s PCE price index to the list of economic data landing in a sweet spot." He went on, "Inflation keeps its head down, and while economic growth may be slowing, there’s no indication it’s falling off a cliff.” Damian McIntyre of Federated Hermes isn’t pessimistic either. “Today’s inflation print confirms what Jerome Powell told us last week: inflation is falling, the consumer is strong, and the labor market remains resilient,” he says.

What About the Rest of the World?

Meanwhile, over in China, the CSI 300 Index wrapped up its best week since ’08. How? Credit one of China’s boldest policy moves in years, with Beijing unleashing a massive stimulus package to shore up a sluggish economy and boost investor confidence. Japan’s yen had a bit of a revival too. Shigeru Ishiba snatched the leadership of the ruling party, supporting the Bank of Japan’s idea of gradually hiking rates.

Market Movements and Key Data Points

Stocks

• The S&P 500: rose 0.2% by 11:15 a.m. NY time
• Nasdaq 100: dropped 0.3%
• Dow Jones Industrial Average: climbed 1%
• Stoxx Europe 600: up 0.5%
• MSCI World Index: increased 0.4%

Currencies

• Bloomberg Dollar Spot Index: fell 0.2%
• Euro: steady at $1.1170
• British pound: stable at $1.3402
• Japanese yen: rose 1.2% to 143.00 per dollar

Cryptocurrencies

• Bitcoin: upped 2.6% to $66,362.13
• Ether: jumped 2.2% to $2,690.95

Bonds

• 10-year Treasuries: yield down two basis points to 3.77%
• Germany’s 10-year yield: down four basis points to 2.14%
• Britain’s 10-year yield: eased two basis points to 3.99%

Commodities

• West Texas Intermediate crude: up 0.3% to $67.90 a barrel
• Spot gold: dropped 0.8% to $2,650.19 an ounce

Final Thoughts

The market’s doing its usual dance, reacting to every breadcrumb of data, no matter how small. China’s stimulus and Japan’s political reshuffling are throwing their own spices into the mix. And let’s be honest, we don’t know how this ends until it’s over. Stay tuned, keep your wallets close, and never bet the farm.

This article was put together with a bit of help from Bloomberg Automation and the diligent work of Winnie Hsu, Divya Patil, Alex Nicholson, Sujata Rao, Margaryta Kirakosian, and Edward Bolingbroke. For more on this story and others, check out Bloomberg Businessweek.

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