Wall Street

saw a relief rally as cooler-than-estimated inflation reinforced trader conviction on Federal Reserve

interest-rate

cuts.

Stocks extended their October advance, with the

S&P 500

hitting all-time highs on bets policy easing will power corporate earnings. While the reaction in Treasuries was more subdued, money markets continued to priced in a high likelihood of two Fed reductions before the year is over.

The slowest pace in three months for underlying inflation was a welcome surprise for traders, who’ve been flying almost blind amid the dearth of economic data since the start of the government shutdown. The September core consumer price index increased 0.2 per cent from August. On an annual basis, it rose three per cent.

While the central bank was already widely expected to lower borrowing costs at its meeting next week, the CPI report may help convince policymakers that they can do so again in December.

“Good news on a Friday!” said Art Hogan at B. Riley Wealth. “This report will clearly keep the Fed on track to cut rates at its next meeting. The Fed has been clear that they are more focused on the softening labor data and will continue to defend their full employment mandate, even with core CPI well above their two per cent target.”

Separate data showed U.S. consumer sentiment fell in October to a five-month low, as worries persisted about stubbornly high prices and the impact on their finances.

The S&P 500 rose almost one per cent. Treasury two-year yields fell two basis points to 3.47 per cent. The dollar wavered.

“There was little in today’s benign CPI report to ‘spook’ the Fed and we continue to expect further easing at next week’s Fed meeting,” said Lindsay Rosner at

Goldman Sachs Asset Management.

“A December rate cut also remains likely with the current data drought providing the Fed with little reason to deviate from the path set out in the dot plot.”

The cooler-than-expected CPI confirms what we’ve seen overall from private data during the government shutdown — little indication that inflation is surging or that the labor market is falling off a cliff, according to Ellen Zentner at Morgan Stanley Wealth Management.

“For a Fed focused on prudent ‘risk management,’ that should translate into another rate cut next week, and likely more to follow,” she said.

To Bret Kenwell at eToro, it would have taken a shockingly bad report to derail an October rate cut, but at a time where economic data is a bit sparse, investors will take any clarity they can get.

Kenwell also noted that while we may in fact get two more rate cuts this year, the Fed will struggle to justify a more aggressive rate-cutting approach in the face of stubbornly high inflation — unless there’s persistent and notable weakness in the

labour market.

“Regardless, stocks can do well in a mild inflationary environment, as we have seen over the past few years. For that to continue, we’ll need to see strong earnings, and so far this earnings season, that’s been the case,” he said.

“Much like a Sherlock Holmes’ story, inflation is the dog that didn’t bark,” said Chris Zaccarelli at Northlight Asset Management. “So many people have been expecting a sharp increase in inflation and have positioned bearishly as a result, but the market is likely to keep squeezing the shorts until they realize that the economy – and Corporate America – is more resilient than many expected.”

Zaccarelli also noted that while valuations are high and there are risks in the market, with the Fed cutting rates and corporate profits continuing to increase, it’s hard to see an interruption of this year’s bull market.

“Next year will bring new challenges, but we wouldn’t advise getting in the way of the upward trend between now and year-end,” he said.

“Overall, the inflation figures for September locked in a 25 basis-point cut next week and will likely result in a ‘dovish cut’ tone,” said Ian Lyngen at BMO Capital Markets. “We suspect that a December cut is also cemented by this print given that the government shutdown is an ongoing factor.”

Traders are betting that the Fed will cut the rate by a total of 120 basis points over the next 12 months. That would bring benchmark borrowing costs to 2.9 per cent, below the three per cent mark — considered a neutral level that neither stimulates or restricts the economy.

At

JPMorgan Chase & Co.,

Michael Feroli says the case for expecting a cut next week is a simple one: Fed speakers, even some of the more hawkish ones, have done little to push back on the market’s firmly held view that a cut is coming.

Feroli expects the post-meeting statement will be little-changed relative to the September statement. At the press conference, he believes that

Chair Jerome Powell

will continue to characterize the easing as a risk management move.

“We don’t anticipate he will signal any bias regarding the December meeting; with potentially three months’ worth of data to be released between now and then we see little upside from any signaling that could end up being quite improvident,” he said.

“The data confirms that U.S. inflation remains sticky, but is gradually fading, reinforcing the case for multiple Fed rate cuts into next year,” said Florian Ielpo at Lombard Odier Asset Management.

In fact, while signs of tariff-induced inflation are apparent in select categories such as apparel and furniture, goods prices increased at a slower pace in September than August broadly, according to Josh Jamner at ClearBridge Investments.

“This suggests that the pass-through of higher tariffs to consumers has continued to undershoot expectations, which in turn has opened the door for the Fed to lower rates to support a cooling labor market,” he said.

Jeffrey Roach at LPL Financial noted that while tariffs were likely the culprit for rising apparel prices in September, inflation metrics will likely improve by December, setting the Fed up to continue easing throughout 2026.

“Inflation is staying contained at this point,” said Eric Teal at Comerica Wealth Management. “The impact from tariffs has been felt mostly felt in lower end consumption imports. The tariff effects will probably increase the longer they remain in place. However, the current inflation report combined with a weaker job market provides cover for additional rate cuts in 2025 and into next year.”

When the markets are hungry for data, any tidbit might look like fine dining. Such is the case as we awaited the delayed CPI report to consider what, if any impact it might have on the Fed’s decision next week. The expectation is for the Fed to cut rates, so it would take a material upside surprise to alter course.

The Fed will cut next week and in a welcome development, we have seen longer term rates, including home mortgage rates, decline of late. The bigger picture remains a question, but inflation will not stand in the way of the Fed at the moment.

Inflation coming in weaker-than-expected further solidifies a continuation of the Federal Reserve’s rate cutting cycle, at least for the next two meetings. We expect at least two 25 basis point cuts to end 2025 and for the Fed to take a slight pause to review a few months of data before cutting again in 2026.

Market sentiment was also helped by a White House announcement that

U.S. President Donald Trump

will meet his Chinese counterpart Xi Jinping, a chance for cooler heads to prevail after a recent flare-up in trade tensions.

Other trade conflicts continue to simmer, however. Trump said he would immediately halt all trade negotiations with Canada, citing a Canadian advertisement against his signature tariffs plan featuring the voice of former President Ronald Reagan.

Bloomberg.com