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September opened with markets treading cautiously as investors balance optimism over Federal Reserve rate cuts against persistent inflationary pressures. Equity indexes posted weekly gains, but fresh CPI data, labor market revisions, and tariff-driven costs underscore the challenges facing policymakers. With the FOMC meeting ahead and key economic releases on deck, the coming days will be pivotal in shaping the outlook for growth, inflation, and monetary policy.
Equity Markets Hold Ground
The equity markets ended last week with mixed results:
- Nasdaq: +0.44% to 22,141.10
- S&P 500: +0.05% to 6,584.29
- Dow Jones: -0.59% to 45,834.22 (after topping 46,000 on Thursday for the first time)
Despite Friday’s uneven performance, all three major indexes posted weekly gains. Markets now turn their focus to the Federal Open Market Committee (FOMC) meeting, where expectations center on a quarter-point rate cut.
Inflation and Policy Pressures
The latest Consumer Price Index (CPI) release underscores the Fed’s challenge:
- August CPI: +0.4% month-over-month, +2.9% year-over-year
- Core CPI: +0.3% in August, +3.1% year-over-year
- Food prices climbed 0.5%; gasoline rose 1.9%
- Used vehicles, apparel, and airfare contributed to the increase
The Fed’s preferred measure, the PCE deflator, is projected to run near 2.9% annually—well above its 2% target. Producer Price Index (PPI) data also suggests inflation is running closer to 3% than 2%.
Complicating matters are new tariff policies and political pressure from the administration, both of which risk adding fuel to inflationary trends.
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Labor Market Weakness Emerging
Employment revisions and unemployment claims point to a cooling labor market:
- Revisions: 911,000 fewer jobs created through March 2025
- Average shortfall: 76,000 fewer jobs per month
- Jobless claims: +27,000 to 263,000 (highest since October 2021)
The softer labor backdrop may eventually dampen consumer spending, which has remained resilient so far.
Economic Indicators to Watch This Week
Several key data points will guide markets alongside the Fed meeting:
- Retail Sales (Tuesday): July rose 0.5%, signaling resilient spending. August expected +0.4%, though future momentum may soften.
- Housing Starts (Wednesday): July surged 12.6% to 1.428M, driven by multifamily units. A pullback of 3.4% to 1.380M is expected for August, with higher mortgage rates and record inventories weighing on demand.
- Industrial Production, Business Inventories, Import Prices: All scheduled for release this week.
Strategic Takeaway
Markets remain caught between optimism for sustained rate cuts and the reality of persistent inflationary pressures. With labor markets softening and housing demand uncertain, the Fed faces a delicate balancing act. This week’s meeting and data releases will provide clearer signals on whether policy can thread the needle between supporting growth and containing inflation.
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