Why the latest inflation report is a best-case scenario for the stock market

Business Insider

a day ago

The stock market is rallying on the latest inflation report.
The S&P 500 hit an intraday record of 6,428.78 following the report, while the Nasdaq rose nearly 1% and the Dow spiked more than 400 points. The benchmark S&P 500 is up more than 9% year-to-date.
Here's where US indexes stood around 11:20 am ET on Tuesday.
The consumer price index rose 2.7% year-over-year in July, slightly below economists' expectations of 2.8%. For investors, this was just right — not too hot, not too cold.
That's mainly because it was likely low enough to allow the Federal Reserve to cut rates at its September meeting, traditionally a bull catalyst for stocks.
The CME FedWatch Tool now shows markets seeing 92% odds the Fed cuts rates by 25 basis points next month, up from about 80% on Monday. Higher odds are also being priced in for a cut in October and December following Tuesday's CPI release.
"Tuesday's CPI data was tame enough that it gives the Federal Reserve the green light to cut rates by at least 25 basis points in September and opens the possibility of a larger 50 basis point cut in September," said Skyler Weinand, chief investment officer at Regan Capital, on Tuesday. "This data, coupled with the weak July employment report from earlier this month, puts the nail in the coffin for lower interest rates."
Investors had been waiting for more insight into how higher tariffs would affect inflation data, and the July number shows the impact has not been severe, at least for now.
To be sure, with many deadlines for tariffs set for August, the impact on inflation could be more pronounced in the coming months.
But for now, the market is cheering higher rate-cut odds for September and a lower likelihood of the economy's most dreaded scenario—stagflation—when inflation surges while economic activity stalls.
On the flip side, inflation was high enough to signal that consumer demand is strong enough to continue to support price growth. The July payrolls report, which saw massive downward revisions to June and May data, had fueled fears that a potential recession was underway. Trump fired Bureau of Labor Statistics director Erika McEntarfer after the report was released.
While July's inflation data was satisfactory for investors, the Fed isn't out of the woods yet on inflation, and further rate cuts after September are not guaranteed, said Seema Shah, chief global strategist at Principal Asset Management.
"The concern for the Fed is that with inventory run-down, the tariff-induced boost to inflation is likely to grow over the coming months, meaning that inflationary pressures are likely to pick up just as the Fed starts to resume rate cuts," Shah said in an email Tuesday. "Markets like today's inflation print as it means the Fed can lower rates unheeded next month — rate cut decisions in October, December and beyond may well be more complicated."
Trump blasts Powell again
President Trump weighed in on the July inflation numbers in a Truth Social post on Tuesday morning, again urging Fed Chair Jerome Powell to slash rates.
"Jerome 'Too Late' Powell must NOW lower the rate. Steve 'Manouychin' really gave me a 'beauty' when he pushed this loser. The damage he has done by always being Too Late is incalculable," Trump wrote.
"Fortunately, the economy is sooo good that we've blown through Powell and the complacent Board. I am, though, considering allowing a major lawsuit against Powell to proceed because of the horrible, and grossly incompetent, job he has done in managing the construction of the Fed Buildings," he continued. "Three Billion Dollars for a job that should have been a $50 Million Dollar fix up. Not good!"