Markets Slip on Hotter-Than-Expected Inflation, But Fed Still Seen Cutting Rates

Markets turned lower Thursday after U.S. inflation data for August came in slightly above forecasts, though traders still expect the Federal Reserve to lower interest rates at its meeting next week.

The Consumer Price Index (CPI) rose 0.4% in August, ahead of the 0.3% consensus estimate and up from 0.2% in July. On a year-over-year basis, CPI increased 2.9%, matching forecasts but above July’s 2.7% print.

Core CPI — which strips out food and energy — climbed 0.3% on the month, in line with expectations and steady from July. Annual core inflation also held at 3.1%, as projected.

Bitcoin reacted with a modest decline, slipping about 0.5% from $114,300 to $113,700 immediately after the release. U.S. stock index futures also retreated, paring earlier gains to trade just 0.1% higher. In the bond market, the 10-year Treasury yield dropped five basis points to 4.00%, while the dollar firmed slightly. Gold pared earlier losses, last up 0.15% at $3,675 per ounce.

The downside pressure was partly offset by a weaker-than-expected labor report published alongside the CPI. Initial jobless claims rose sharply to 263,000 from 236,000 the prior week, well above forecasts for 235,000. The jump signaled further cracks in the labor market and likely contributed to the sharp move lower in Treasury yields.

The data highlights the Fed’s challenge as it weighs policy: inflation remains sticky, yet the employment backdrop is deteriorating.

Ahead of the report, futures markets had priced in a 92% chance of a 25-basis-point cut and an 8% probability of a larger, 50-basis-point move, according to CME FedWatch. The hotter inflation print all but rules out the larger cut, which had gained traction following last week’s soft jobs data and weaker-than-expected producer price numbers.