[New York Stock Market] July CPI Spurs Rate Cut Hopes, Broad Rally Sends S&P and Nasdaq to Record Highs

July CPI Up 2.7% Year-on-Year;
September Rate Cut Odds Top 90%
Core CPI Rises 3.1%, Adding Uncertainty to Rate Outlook
Small Caps Rally on Expected Borrowing Cost Relief
Focus on July PPI and Retail Sales Data Due August 14-15

The three major indices of the New York Stock Exchange all closed higher on August 12 (local time). Following the release of the July Consumer Price Index (CPI), which came in below market expectations, optimism for a rate cut in September grew, pushing both the S&P 500 and the Nasdaq to record highs.

Reuters Yonhap News

On this day, the blue-chip Dow Jones Industrial Average closed at 44,458.61, up 483.52 points (1.1%) from the previous session. The large-cap S&P 500 rose 72.31 points (1.13%) to finish at 6,445.76, while the tech-heavy Nasdaq climbed 296.5 points (1.39%) to close at 21,681.9, both setting new all-time highs.

The July CPI coming in below forecasts boosted investor sentiment. According to the U.S. Department of Labor, the CPI for July 2025 rose 2.7% year-on-year, matching June’s figure of 2.7% and falling short of the market estimate of 2.8%. The core CPI, which excludes volatile energy and food prices, increased by 3.1% year-on-year, surpassing both June’s 2.9% and the expected 3.0%. While the rise in core CPI remains a concern, the market focused on the headline CPI’s stagnation, fueling hopes for a rate cut.

Although aggressive tariff policies are affecting prices, their impact has been less severe than anticipated. Combined with the recent slowdown in employment, this has further heightened expectations for a rate cut in September. The interest rate futures market now reflects a 94.4% probability that the Federal Reserve will lower its benchmark rate by 0.25 percentage points, from the current 4.25-4.5%, at the September Federal Open Market Committee (FOMC) meeting. This is up from 85.9% the previous day. The probability of a total 0.5 percentage point cut by October and a total 0.75 percentage point cut by December has also risen to 60.5% and 49.3%, respectively. However, the likelihood of cuts in October and December has slightly decreased compared to immediately after the CPI report was released earlier in the day.

President Donald Trump renewed his call for a rate cut to Federal Reserve Chair Jerome Powell immediately after the July CPI release. President Trump also stated that he is considering filing a lawsuit against Chair Powell for excessive spending on headquarters renovations, adding, "Powell, who always moves too late, must cut rates now. The damage he is causing is incalculable."

Alexandra Wilson-Elizondo, Global Co-Chief Investment Officer (CIO) of Multi-Asset Solutions at Goldman Sachs, commented, "There is no clear sign of significant price increases due to tariffs," adding, "Today's inflation data supports the possibility of a 'preventive' rate cut in September, which will be a key driver for the market."

Chris Zaccarelli, CIO of Northlight Asset Management, predicted, "The upward momentum in stock prices can continue," but added, "A correction would require much higher inflation numbers or another shock to the market."

Other economic indicators are also scheduled for release this week. The Producer Price Index (PPI) for July, due out on August 14, is expected to rise 0.2% from the previous month, while July retail sales, to be released on August 15, are projected to increase by 0.5%.

Tariff-related uncertainty has also eased. President Trump signed an executive order the previous day extending the reduction of high tariffs on China for 90 days, thereby maintaining the 'tariff truce' between the two countries. Previously, the U.S. and China had agreed to reduce tariffs on each other's goods by 115 percentage points for 90 days. Currently, the U.S. imposes a 30% tariff on Chinese goods, while China imposes a 10% tariff on U.S. goods.

U.S. Treasury yields have edged lower, especially for short-term bonds, reflecting expectations of a rate cut. The yield on the two-year Treasury, which is sensitive to monetary policy, fell by 2 basis points (1bp = 0.01 percentage point) to 3.73%, while the 10-year Treasury yield, the global benchmark, remained around the previous day's level at 4.28%.

By sector, small-cap stocks-which are expected to benefit from lower borrowing costs if rates are cut-rose, with the small-cap Russell 2000 Index surging 2.99%. Stablecoin issuer Circle Internet Group climbed 1.27% after posting a surprise second-quarter earnings report. Intel gained 5.46% after rising 3.51% the previous day, following CEO Lipbu Tan's visit to the White House for talks with President Trump amid pressure from the president to resign.