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Wall Street experienced a rally fueled by speculation that the Federal Reserve would ease interest rates in the coming months, following a mix of inflation data and rising jobless claims. The August consumer price index (CPI) indicated that inflation was 2.9% per annum, which remained above the Fed target of 2% but was not high enough to trigger panic.
Meanwhile, the number of initial jobless claims for the week ended September 6 increased by 27,000, the highest level since October 2021, indicating the possibility of cooling the labor market. This combination of data left markets optimistic about imminent monetary policy adjustments.
Although inflation remains above the Federal Reserve's target, the latest CPI figures were generally in line with expectations and did not reflect any runaway prices. Instead, an increase in the number of jobless claims was the most significant trigger in market sentiment.
The 263,000 claims represented a notable increase and more anticipation that the Fed would focus on the labor market and less on the aggressive focus on inflation. Consequently, rates were priced in at a 25 basis-point reduction by the Fed at its upcoming meeting, with some analysts projecting numerous such reductions before the year ends.
The S&P 500 rose 0.7%, the NASDAQ 100 climbed 0.6%, and the Dow Jones Industrial Average saw a 1.1% increase, reflecting the positive sentiment surrounding expectations of a rate cut.
Other indices had positive gains, with the Stoxx Europe 600 index increasing 0.6% and the MSCI World Index increasing 0.7%. The Bloomberg Magnificent 7 Total Return Index increased by 0.8%, and the Russell 2000 Index increased by 1.2%, showing widespread optimism in world equity markets.
The optimistic mood spread to other asset categories, where the US Dollar Index dropped by 0.2%. The euro increased by 0.3% to $1.1732 and the British pound by 0.3% to $1.3568. The Japanese yen also gained slightly, advancing by 0.2% to 147.17 against the dollar. Meanwhile, in the cryptocurrency market, Bitcoin gained 0.5% to reach a price of $114,229.79, and Ether gained more by 1.7%, currently being traded at $4,406.29.
In the bond market, yields on US Treasuries saw slight declines. The yield on the 10-year Treasury fell three basis points to 4.01%, while the 2-year yield also decreased by three basis points, settling at 3.52%.
The 30-year Treasury yield dropped four basis points to 4.66%. Meanwhile, commodities were more mixed, with West Texas Intermediate crude dropping by 2% to $62.42 a barrel and spot gold declining by 0.2% to $3,633.17 an ounce.
The combination of inflation data and labor market weakness is influencing the Fed's decision-making, as many economists now predict a rate cut in the near future. Fed Chair Jerome Powell has admitted that it is difficult to strike a balance between fighting inflation and maintaining employment stability.
Recent economic statistics indicate that the labor market slowdown is a more urgent issue. With the labor market suggesting signs of cooling, markets are growing more confident that the Fed will focus on monetary easing to encourage job creation.
For now, inflation remains a concern, but the focus is shifting toward economic growth and employment levels. Should the momentum of increasing jobless claims persist, the Fed will probably be operating in a more complex economic environment in the coming months.
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