Fed Rate Cut Expectations Attract Capital Inflows, But Will Valuation Risks Affect U.S. Stock Rally?

Last week's key U.S. economic data primarily focused on inflation and retail sales growth. The Consumer Price Index (CPI) released on Tuesday met expectations, but Thursday's Producer Price Index (PPI) painted a different inflation picture—much hotter than anticipated, with a 0.9% month-on-month increase and core monthly inflation rising 3.7%, the highest level since March.

Retail sales grew by 0.5%, while the University of Michigan consumer survey showed U.S. consumer confidence declining more than expected, with heightened concerns over rising inflation. One-year inflation expectations rose to 4.9% from 4.5% in July, while the five-year inflation outlook climbed from 3.4% to 3.9%.

In the labor market, initial jobless claims dropped from 226,000 to 224,000, slightly below the expected 225,000. Continuing claims fell by 21,000 to 1.953 million, indicating that while the job market faces stagnation, it remains stable.

Bob Schwartz, Senior Economist at Oxford Economics, told First Financial that while the prospect of a September rate cut depends more on upcoming labor market data, July's mixed inflation figures have made the Fed uneasy. Currently, tariff impacts are uneven and will continue to push inflation higher in the coming months. He noted that policymakers may struggle to distinguish between persistent inflation pressures and one-off tariff effects.

According to the CME FedWatch Tool, the probability of a 25-basis-point rate cut in September briefly reached 99.9% midweek but has since stabilized around 85%, reflecting near-full market pricing.

Schwartz added that inflation uncertainty will likely make many FOMC members cautious about cutting rates. Beyond July's weak jobs report, broader business and labor market data align with economic resilience. He emphasized that market focus will now shift to the Jackson Hole Symposium, where Fed Chair Jerome Powell's keynote speech on Friday will be closely scrutinized for any hints or pushback on rate cut expectations.