Markets Climb on Cooler Inflation and AI Optimism Ahead of CPI Data

Stocks pushed to new all-time highs Wednesday as a surprise drop in producer prices boosted expectations for a September Fed rate cut, with tech leading gains thanks to Oracle’s blowout earnings. The S&P 500 and Nasdaq Composite both notched record closes, while Treasury yields slipped and the dollar remained flat. Investor focus now turns to Thursday’s CPI release, the final major data point before next week's Fed decision.

Key Headlines & Market Movers

• Producer Price Index Cools, Fueling Rate Cut Bets: August’s Producer Price Index unexpectedly declined 0.1%, easing fears that inflation was re-accelerating. Markets interpreted this as a green light for policy easing, with Fed funds futures now nearly pricing in three cuts by year-end. While some economists noted the decline was partly due to margin compression rather than broad-based disinflation, it nonetheless reinforced the dovish narrative heading into next week’s FOMC meeting.
• Oracle Leads Tech Surge Amid AI Demand Boom: Oracle jumped 36% after strong cloud guidance and reports of a $300 billion deal with OpenAI, reigniting enthusiasm around AI infrastructure. The ripple effect lifted other AI-related names like Broadcom, Nvidia, and AMD. Analysts remain constructive on tech valuations, citing robust earnings momentum and the likelihood of lower rates providing support for multiples.
• Fed Outlook Shifts Toward Easing, but Debate Over Size of Cut Remains: Markets widely expect the Fed to cut rates next week, with many economists favoring a 25-basis-point move. However, some see a case for a 50-point cut given softening labor data and manageable inflation. Powell’s Jackson Hole remarks already hinted at a shift in tone, and tomorrow’s CPI will help determine the pace and depth of the upcoming easing cycle.
• Equity Risk Premium Shrinks, Highlighting Rate Dependency: With stocks at record highs and Treasury yields falling, the equity risk premium has turned negative, suggesting stocks are richly valued relative to bonds. This dynamic puts additional pressure on the Fed to deliver on rate cuts to justify current valuations. Still, strategists argue the market is pricing in productivity gains and fiscal tailwinds that may support continued strength in equities.

S&P 500 Sector Performance

Looking Ahead

All eyes are on Thursday’s CPI report, which will either confirm or complicate expectations for near-term rate cuts. A softer-than-expected core CPI print could open the door for a 50-basis-point move, while a firm reading may lock in a more measured pace. Investors will also monitor follow-through in tech, especially around AI-linked names, as sentiment builds ahead of a potentially pivotal Fed meeting.

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