Markets are awaiting, this week, the release of the (CPI) for the month of August, a critical indicator that could reshape expectations for policy in the coming months.
In July, inflation data offered a measure of cautious relief. rose just 0.2% on a monthly basis and 2.7% year-on-year, while , which excludes food and energy, climbed 0.3% month-over-month to reach an annual pace of 3.1%, which is slightly above expectations, a reminder that underlying price pressures remain sticky despite softer headline figures.
Looking ahead to August, expectations point to headline inflation at roughly 2.9% year-on-year and at 3.02%, with , another key gauge followed by the Federal Reserve holding just under the 3% threshold. These projections reinforce the view that inflation remains above target but is showing signs of stabilization.
On the other hand, The U.S. labor market has shown unmistakable signs of strain in recent weeks, with a huge revision of job growth downward by an extraordinary 911,000 for the 12 months through March 2025, cutting average monthly gains nearly in half, from 147,000 to just 74,000, while the climbed to 4.3%, its highest level since 2021. Key sectors such as manufacturing and federal employment bore the brunt of this slowdown.
This growing softness in the labor market has become a central driver of expectations for a more dovish Federal Reserve. Market consensus aligns with this outlook, with strong confidence in a 25-basis-point cut at the September 16–17 meeting. A larger 50-basis-point move remains on the table but is currently seen as a remote possibility, with odds hovering around just 10%.
Market Behavior: Bonds, Stocks, Commodities, and the Dollar
Financial markets have been adjusting closely to changing expectations about Federal Reserve policy. Equity indices have advanced cautiously, lifted by the rising probability of a September rate cut. The prospect of lower borrowing costs has particularly supported interest-rate sensitive sectors such as technology and real estate, while more defensive segments like utilities have also benefited from the decline in Treasury yields.
Bond markets have shown even clearer conviction. Yields on U.S. Treasuries have eased across the curve, reflecting a flight into duration as investors anticipate an easier policy stance. The , which is most sensitive to monetary policy expectations, has fallen more sharply than the , further flattening the curve and underscoring confidence in imminent Fed action.
Meanwhile, continues to shine as a hedge against monetary easing and long-term inflation uncertainty. The metal has held firm near record levels, supported not only by expectations of U.S. rate cuts but also by steady central bank demand and ongoing geopolitical risks.
The itself has been under pressure, as traders increasingly price in Fed easing. A softer dollar has provided additional support to commodities and emerging market assets. However, analysts caution that if the Fed signals a slower pace of cuts than markets anticipate, the greenback could rebound sharply, catching speculative positions off guard.
Yet, optimism is not without caveats. major banks have warned that the September meeting could trigger a classic “sell-the-news” reaction. With equities already pricing in a rate cut, the actual announcement may prompt investors to take profits, particularly if the Fed strikes a cautious tone about future moves. Such a dynamic could spark short-term volatility across risk assets, even as the broader trend remains anchored to easier policy.
What to Watch in the August CPI Report
Markets will not only be focused on the headline figures but also on the underlying composition of inflation. , stripping out volatile food and energy components, remains the key metric for policymakers. Investors will be scrutinizing whether it continues to hover around the 3% level or shows the first meaningful signs of cooling. Any moderation here would provide the Fed with greater confidence to accelerate rate cuts, while persistence above expectations could revive fears of entrenched inflation.
Particular attention will fall on services inflation, which has been the stickiest component in recent months. Categories such as medical care, insurance, and shelter account for a large share of consumer spending, and inflation in these areas tends to be slower to reverse. Shelter, in particular, has been a driver of core CPI, and while private-sector data suggests rent growth has been easing, the lag in how it is measured in CPI means it could remain stubbornly high in official data for several more months.
On the goods side, markets will also watch for signs of tariff-related pass-through effects, especially in sectors like autos, consumer electronics, and apparel. While so far muted, any evidence that tariffs are beginning to push prices higher could challenge the assumption that inflation pressures are narrowing.
The interplay between headline and core inflation will guide Fed messaging. A cooler print, especially on the services side, could reinforce dovish expectations, driving bond yields lower and sustaining equity market momentum. Conversely, an upside surprise, driven either by sticky rents, stubborn services, or energy shocks, would complicate the Fed’s narrative, potentially forcing policymakers to slow the pace of easing. This would likely trigger a stronger dollar, weaker equities, and renewed volatility across global markets.
Finally, Fed officials’ commentary following the release will carry as much weight as the numbers themselves. If policymakers emphasize the “stickiness” of inflation, even amid softening jobs data, markets may revise the size and speed of expected cuts. On the other hand, a dovish interpretation, framing inflation as stabilizing while employment deteriorates, could solidify the case for multiple rate reductions by year-end.
