Dollar, Treasury Yields Rise As Small Caps Fall: August Inflation Crushes Odds Of 50-Point Fed Rate Cut

Zinger Key Points

• U.S. inflation in August falls to 2.5%, its lowest since February 2021, but core inflation remains sticky at 3.2%.
• Odds of a 50-basis-point rate cut at the Sept. 18 FOMC meeting drop to 15%, down sharply from 34%, per CME FedWatch.

U.S. inflation in August hit its lowest annual rate since February 2021 at 2.5%, falling from 2.9% in July and below the expected 2.6%, yet the underlying story tells a more complicated tale.

Stripping out volatile food and energy prices, core inflation pressures remain stubborn at 3.2% as shelter costs surged at their fastest monthly pace since January 2024, fueling gains in the dollar and sending Treasury yields climbing.

Expectations for a hefty 50-basis-point rate cut at the Sept. 18 FOMC meeting plummeted to just 15%, down from 34% a day earlier, as per CME Group’s FedWatch tool.

Traders now increasingly anticipate a more measured 25-basis-point cut, as sticky core inflation—particularly in services—remains a key factor under close watch by the Fed.

Energy goods and services indices saw notable monthly drops, helping to ease overall price pressures. Gasoline prices fell 0.6% month-over-month in August after holding steady in July, while electricity declined 0.7% and utility bills for piped gas services dropped 1.9%.

Market Reactions

The mixed August inflation report and the corresponding drop in investor expectation for a larger rate cut by the Federal Reserve at the September meeting triggered the following reactions in major assets:

• The S&P 500 opened Wednesday’s session 0.2% lower.
• Tech stocks were flat.
• Small caps sunk 1%.
• Gold prices fell by 0.4%.
• Bitcoin fell 2%.

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Originally Posted September 11, 2024 – Dollar, Treasury Yields Rise As Small Caps Fall: August Inflation Crushes Odds Of 50-Point Fed Rate Cut