Weekly stock market update | Edward Jones

To cut or not to cut? Fed likely to lean toward action

Key takeaways

• Inflation remains manageable but not resolved. July’s U.S. CPI was in line with expectations, but sticky services inflation and rising producer prices suggest upside risks persist. Canada’s core inflation is also expected to tick up when reported later this week.
• The Fed pivot appears to be gaining traction, with inflation coming in less severe than feared and labour-market data showing signs of cooling, pushing market-implied odds of a September rate cut to more than 80%. An “insurance” cut may be warranted as a preemptive move next month.
• Upcoming Fed easing, with the economy still resilient, may help broaden market leadership. Last week’s outperformance of U.S. small-caps, value stocks, and the equal-weighted S&P 500 may have provided a taste of that.
• Timely opportunities in equities may include rate-sensitive U.S. sectors like consumer discretionary and financials, while mid-caps could offer cyclical upside with a quality tilt. In fixed income, we see short-term bonds providing liquidity and stability, while longer maturities could offer attractive yields in a potentially lower-rate U.S. environment, which could also help anchor Canadian yields.

To cut or not to cut—that looks to be the question the Fed now faces, as mixed inflation readings give way to growing signs of labour-market softness. Though the path to rate cuts remains uncertain, the narrative is tilting toward a cautious move, perhaps marking a meaningful shift in tone ahead of Chair Powell’s speech at the Jackson Hole Symposium on August 22. We offer our take on July’s U.S. inflation data and its potential implications for Fed policy and portfolio positioning.

July inflation: No worse than feared, but upside risks remain 

Markets were closely watching last week’s U.S. consumer price index (CPI) report, anticipating a potential tariff-driven uptick in July inflation. The headline CPI held steady at 2.7%, thanks in part to a decline in gasoline prices. Meanwhile, core CPI, which excludes food and energy, rose to 3.1% from 2.9%, its highest level since February¹. Both figures came in largely in line with expectations, offering some relief to equity and bond investors. 

However, the underlying details revealed some surprises. Goods prices increased just 0.2% month-over-month, matching June’s pace, while services prices accelerated by 0.4%, driven by notable increases in airfares, medical services, and auto repairs¹.

The glass-half-full interpretation is that tariffs, one of Fed Chair Powell’s key concerns, were not the primary driver of the core inflation uptick. Still, it may be premature to draw firm conclusions. Notably, producer prices also rose more than expected last week, marking the fastest pace of wholesale inflation in three years¹. This helps raise the possibility that businesses could begin passing higher import costs onto consumers, something they’ve largely avoided so far.

Also, the renewed momentum in services costs underscores the risk of declaring victory over inflation too soon. That said, we see no signs of a 2022-style inflation surge on the horizon. Any tariff-related price pressures are likely to be temporary, and the broader inflation outlook remains manageable for now, in our view.