Markets Climb as Fed Cut Bets Solidify Amid Soft Data

Markets resumed their upward march Monday, with major U.S. indexes closing near record highs. Traders continue to price in nearly three rate cuts by year-end, as expectations grow that the Federal Reserve will act as soon as next week. Last week's softer jobs data reaffirmed views that the labor market is cooling, but not collapsing. This week's inflation reports will be crucial in determining the pace of policy easing. While tech stocks were mixed, broader sentiment remains constructive, driven by falling yields, a weaker dollar, and hopes of a soft landing.

Key Headlines & Market Movers

• Fed Cuts in Focus as Economic Data Weakens, But Resilience Remains: Last week's soft payrolls report triggered a reassessment of the Fed’s policy path, with futures markets now bracing for cuts starting September 17. Fed officials have downplayed tariff-induced inflation, instead focusing on slowing job growth as a key risk. With little sign of recession, investors are positioning for a so-called “early-cycle” environment, typically supportive of equities.
• Inflation Data Could Set Tone for Remainder of Year: Thursday’s CPI reading is expected to show another 0.3% monthly rise in core prices. A hotter print could revive stagflation concerns, while a modest reading would reinforce the easing narrative. Options markets are pricing a relatively muted reaction (~0.7% move), reflecting consensus expectations, but secondary inflation indicators have started to show some heat. Traders will watch closely to see if this confirms a transitory bump or signals a stickier trend.
• Rate Cut Cycles Historically Favor Equities, Especially Outside Recessions: Strategists at Deutsche Bank and Bloomberg Intelligence highlight that when the Fed eases without an active recession, equity markets tend to outperform. The S&P 500 has historically rallied ~50% over the two years following a non-recessionary rate-cutting cycle. Markets may defy the typical September softness if this cycle holds true.
• Rotation Underway - Catch-Up from Small Caps and Financials: Goldman Sachs and Nationwide note the rally is broadening, with small caps and laggards beginning to outperform. Monday saw Robinhood (+16%) and AppLovin (+12%) surge following their S&P 500 inclusion announcement. Regional banks also drew attention, with PNC signaling further geographic expansion following its FirstBank deal.

S&P 500 Sector Performance

Looking Ahead

The stage is set for Thursday’s CPI release to either confirm or disrupt the growing consensus around a September rate cut. While recent market momentum reflects optimism, investors are wary of a potential “sell the news” reaction if the Fed disappoints or inflation surprises to the upside. For now, risk assets are supported by falling yields, dovish expectations, and signs the economy is cooling, but not cracking.

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