The US stock markets witnessed a significant rally on Tuesday, fueled by the recent consumer price index (CPI) data that boosted the anticipation of the Federal Reserve cutting down on interest rates in September. The S&P 500 Index rose by 0.6%, while the Nasdaq 100 gained 0.7% early in the session. Despite inflation accelerating in July, the report showed inflation remained largely in line with expectations, providing relief to investors who had been concerned about tariff-related price hikes.
In July headline inflation remained stable at 2.7% as opposed to the predicted level of 2.8%. Nonetheless, core inflation excluding food and energy prices increased to 3.1%, surpassing expectations. While inflation showed signs of pressure in certain areas, the overall figures were not alarming.
Market players viewed this as an indication that the Federal Reserve would adopt a rate cut and provide easing to the economy, and this could even fuel stock markets. This outlook fueled optimism among traders, pushing stocks higher.
Furthermore, the CPI data has led investors to consider a 25-basis-point September rate cut by the Federal Reserve. However, some have speculated that the central bank would consider a larger reduction of 50 basis points. Futures markets are now pricing in a nearly 93% chance of a 25-basis-point reduction next month, up from 88% prior to the data release.
Skyler Weinand, Chief Investment Officer at Regan Capital, noted that the CPI report gave the Federal Reserve the "green light" to reduce rates. He emphasized that the data was “tame enough” to support an easing of monetary policy. If inflation remains in check, further rate cuts could follow, providing additional support for the stock market.
In addition to the inflation report, market sentiment was also buoyed by news of another tariff truce extension between the US and China. According to President Donald Trump, the tariffs were postponed by 90 more days instead of taking effect on Tuesday. This development eased concerns about escalating trade tensions and giving hope to the stability of global markets .
US businesses, especially retailers also gained as they gear up for the crucial holiday season because of the truce delay. The importers will be able to import items such as clothes and electronic products at lower tariffs, which will enable them to alleviate the short-term cost pressures. In spite of positive trade news, ongoing trade issues between Canada and China are still unsettled, with the latter imposing anti-dumping duties on Canadian canola imports.
The positive momentum continued on Wall Street and S&P 500 into the corporate sector, where key players such as Intel and Meta recorded huge profits. Nvidia, however, suffered a slight setback after China ordered a ban on the use of its H20 processors in government-related applications, complicating the company’s recovery efforts in the region.
Overall, US stocks extended their positive momentum after the CPI report and tariff truce. Traders/analysts expect that the Federal Reserve will take action over the next month to lower interest rates, once again supporting market optimism.