Stocks Rally on Higher Odds for Fed Rate Cut after CPI Report

The S&P 500 Index ($SPX) (SPY) on Tuesday rose by +1.14%, the Dow Jones Industrials Index ($DOWI) (DIA) rose by +1.10%, and the Nasdaq 100 Index ($IUXX) (QQQ) rose by +1.33%.  September E-mini S&P futures (ESU25) rose by +1.06%, and September E-mini Nasdaq futures (NQU25) rose by +1.25%. 

Stocks rallied after Tuesday's CPI report was largely in line with market expectations, thus strengthening expectations for a Fed rate cut at the September meeting.  On a year-on-year basis, the July headline CPI of +2.7% y/y was slightly weaker than expected, but the core CPI of +3.1% y/y was slightly stronger than expected.  The chances for a Fed rate cut at its Sep 16-17 meeting improved to 94% after Tuesday's CPI report from 88% on Monday.

The 2-year T-note yield fell -4.0 bp to 3.729% on the CPI news.  However, the 10-year T-note yield closed the day little changed and saw upward pressure after a new attack by President Trump on Fed Chair Powell. Mr. Trump said in a Truth Social post Tuesday morning that he is considering allowing a lawsuit against Mr. Powell related to construction work at Fed buildings.  The markets are concerned about the inflation risks involved with the attempt by the Trump administration to push Mr. Powell out of the Fed as a means to push interest rates lower.

The July US CPI report of +0.2% m/m was in line with market expectations.  The July CPI year-on-year figure of +2.7% y/y was unchanged from June and was slightly weaker than expectations for a +0.1 point increase to +2.8%.  The July US core CPI report of +0.3% m/m was in line with expectations.  The July year-on-year core CPI figure of +3.1% y/y was up from June's +2.9% and was slightly stronger than market expectations of +3.0%.  July's headline CPI of +2.7% y/y and core CPI of +3.1% y/y were up from the post-Covid 4.25-year lows of +2.3% and +2.8%, respectively, posted earlier this year.

President Trump signed an executive order overnight extending the US-China tariff truce by 90 days through November 10 to allow more time for negotiators to reach a final deal.  That was in line with reporting yesterday by CNBC.  The executive order postponed Tuesday's original deadline.  That followed previous news that Nvidia and AMD agreed to pay the US government 15% of their revenues on sales of certain lower-powered AI chips sold to China in exchange for export licenses to allow those sales. However, Bloomberg reported today that China's government urged Chinese companies to avoid using Nvidia's H20 processors, particularly for government-related purposes.

The markets are awaiting this Friday's Trump-Putin summit in Alaska for any progress in ending the Russian-Ukrainian war.  President Trump on Monday downplayed expectations of a breakthrough, saying the summit is a "feel-out meeting" to end the war in Ukraine.  Also, recent comments from Ukrainian President Zelenskiy dampened hopes for a quick end to the war when he rejected any talk of Ukraine ceding territory to Russia.

In recent tariff news, President Trump early Tuesday extended the tariff truce with China, which was to expire on Tuesday, for another 90 days.  Last Wednesday, President Trump announced that he will impose a 100% tariff on semiconductor imports.  Still, companies would be eligible for exemptions if they demonstrate a commitment to building their products in the US.  However, the US will levy a separate tax on imports of electronic products that employ semiconductors.  Also, President Trump announced last Wednesday that he will double tariffs on US imports from India to 50% from the current 25% tariff, due to India's purchases of Russian oil.  Last Tuesday, Mr. Trump said that US tariffs on pharmaceutical imports would be announced "within the next week or so." According to Bloomberg Economics, the average US tariff will rise to 15.2% if rates are implemented as announced, up from 13.3% earlier, and significantly higher than the 2.3% in 2024 before the tariffs were announced.

The market's focus this week is on corporate earnings results and any new trade or tariff news.  On Thursday, weekly initial unemployment claims are expected to fall by -1,000 to 225,000.  Also on Thursday, the July final-demand PPI is expected to increase to +2.5% y/y from +2.3% y/y in June, and the July PPI ex-food and energy is expected to rise to +2.9% y/y from +2.6% y/y in June.  On Friday, July US retail sales are expected to climb +0.5% m/m and retail sales ex-autos are expected to rise +0.3% m/m.  Also on Friday, July manufacturing production is expected to remain unchanged m/m.  Finally, the University of Michigan's Aug US consumer sentiment index is expected to climb by +0.3 to 62.0.

Federal funds futures prices are discounting the chances for a -25 bp rate cut at 94% at the September 16-17 FOMC meeting and 62% at the following meeting on October 28-29.

Earnings reports indicate that S&P 500 earnings for Q2 are on track to rise +9.1% y/y, much better than the pre-season expectations of +2.8% y/y and the most in four years, according to Bloomberg Intelligence.  With over 82% of S&P 500 firms having reported Q2 earnings, about 82% of companies exceeded profit estimates. 

Overseas stock markets on Tuesday closed the day higher.  The Euro Stoxx 50 closed the day up +0.08%.  China's Shanghai Composite rallied to a 10-month high and closed up +0.50%.  Japan's Nikkei Stock 225 today closed up +2.15% and posted a new record high.

Interest Rates

September 10-year T-notes (ZNU25) on Tuesday fell by -2 ticks, and the 10-year T-note yield ended the day unchanged at 4.285%.  T-note prices received an initial boost from the CPI report but then fell back after President Trump launched another broadside against Fed Chair Powell regarding construction costs on Fed buildings.  T-note prices had support from Tuesday's -1.4 bp decline in the 10-year inflation expectations rate to 2.386%.

European government bond yields rose on Tuesday.  The 10-year German bund yield rose +4.8 bp to 2.744%.  The 10-year UK gilt yield rose +6.1 bp to 4.626%.

Swaps are discounting the chances at 5% for a -25 bp rate cut by the ECB at the September 11 policy meeting.

US Stock Movers

The Magnificent Seven all closed higher on Tuesday, with Meta (META) leading the bunch with a gain of +3.15%.  Nvidia (NVDA) closed the day up +0.57% despite a report that the Chinese government is discouraging Chinese companies from buying Nvidia AI chips, even if the US government allows the sale.

Chip stocks led the Nasdaq 100 index higher, with gains of 5% or more in NXP Semiconductors (NXPI), ON Semiconductors (ON), Microchip Technology (MCHP), and Texas Instruments (TXN).

United Airlines (UAL) was the biggest gainer in the S&P 500 index with a gain of more than +10%.  Airlines were boosted by lower oil prices.  American Airlines (AAL) rallied nearly +12% and Delta Airlines (DAL) rallied by +9%.  However, Spirit Aviation (FLYY) plunged -41% after its subsidiary Spirit Airlines issued a going-concern warning.

Hanesbrands (HBI) rallied +28% after the Financial Times reported that a deal is nearing for Gildan Activewear to acquire Hanesbrands for as much as $5 billion in enterprise value. 

Paramount Skydance (PSKY) rallied by more than +8% after Guggenheim started coverage on the company with a buy rating and a $13 price target due to a positive outlook for the merged entities of Paramount Global and Skydance Media.

Starbucks (SBUX) closed the day up +1.8% on an upgrade to outperform from neutral from Baird.

Cardinal Health (CAH) fell by -7.2% after its fiscal Q4 operating income was below market expectations.

Getty Images (GETY) fell by -2.3% on disappointment after releasing Q2 earnings and guidance.

Earnings Reports (8/13/2025)

Loar Holdings Inc (LOAR), Performance Food Group Co (PFGC), StandardAero Inc (SARO), Coherent Corp (COHR), Cisco Systems Inc (CSCO).