Wall Street claws back losses as Fed cuts loom

MANHATTAN (CN) — Inflation appears to be nearly tamed, according to data released this week, which caused investors to rally back from last week’s disastrous rout.

Markets came close to recouping from last week’s selloff, with the Dow Jones Industrial Average gaining 1,048 points since the closing bell last Friday. The S&P 500 and Nasdaq similarly regained ground lost last week, picking up 218 points and 993 points, respectively.

A pair of inflation reports — both of which show inflation continuing to drop — were the main drivers of equity gains on Wall Street, despite the data leaving little room for a 0.5% interest rate cut next week by the Federal Reserve.

“All clear for launch,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. Along with many other experts, he predicts the Fed will settle on a 0.25% rate cut, adding “the market should be able to reclaim all-time highs, once we get past the volatility that precedes most presidential elections.”

On Wednesday, the U.S. Bureau of Labor Statistics’ consumer price index showed that prices increased just 0.2% last month, the same amount as in July. Core prices, which exclude fuel or food, rose by 0.3% in August.

Digging in, the biggest drop in prices was easily in energy, which fell by 0.8% month over month. Used vehicle prices also fell significantly, with a 1% decline, though shelter prices increased by 0.5% after seeing a 0.4% increase in July.

Shelter prices remain a stubborn point for analysts and could be the reason the Fed ultimately settles on cutting interest rates by 0.25%. Thomas Ryan, North America economist at Capital Economics, said “housing inflation’s reluctance to moderate quickly [is] another possible reason to favor a smaller rate cut” instead of 0.5% cut.

On Thursday, the bureau’s producer price index similarly supported the notion that inflation has been tamed, with the index showing a 0.2% price increase for August. Just like it had for the CPI, the PPI’s core inflation reading for last month came in at 0.3%.

Also, just like the CPI, energy prices in the PPI were the biggest drop last month, declining by 0.9%. Most other measures increased, though by different amounts. Food prices picked up only 0.1%, while trade prices increased by 0.6%. Transportation and warehousing prices lost 0.1%.

Earlier in the week, a pair of surveys also show sentiment remains poor. The National Federation of Independent Business’s survey released on Tuesday showed small business optimism dropped by 2.5 points, erasing gains from July.

“The mood on Main Street worsened in August, despite last month’s gains,” NFIB chief economist Bill Dunkelberg said in a statement. “Historically high inflation remains the top issue for owners as sales expectations plummet and cost pressures increase.”

On Friday, the University of Michigan released its preliminary consumer sentiment index for September, which showed a slight rise from 67.9 in August to a flat 69 points. However, the index still remains below its historical average of about 85 points.

“For most of the year, consumers have cited high prices as their largest concern regarding the economy,” Grace Zwemmer, associated U.S. economist at Oxford Economics, wrote in an investor’s note. “But it appears that progress made on cooling inflation is finally resonating with consumers.”

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