Markets calm before US CPI

Sentiment across financial markets is broadly bullish after yesterday’s US PPI update suggested a notable drop in input price inflation in August. Both headline and core PPI unexpectedly fell last month, pulling the annual figures down to 2.6% for the headline and 2.8% for the core. Though still sticky near 3%, these figures do not disrupt dovish Federal Reserve (Fed) expectations — nor do they strengthen them. US 2-year yields slipped slightly, while the S&P 500 hit a fresh record before giving back gains.

On the equity front, Oracle stood out with a 35% rally after quarterly results impressed thanks to a reported $300bn deal with OpenAI. Nvidia added 3.85% after TSMC posted its second-best month of sales in August, while CoreWeave jumped nearly 17%. AI-related stocks continue to deliver strong results and fuel the rally, but not all are thriving and risks remain. Synopsys fell 35% yesterday, a reminder that the trade war remains a major threat and that Trump’s tariff rhetoric is never far away.

Lower rate prospects are an extra tailwind for tech stocks. Growth company valuations rely heavily on discounting future revenues, and lower rates mean a lower discount factor — and higher valuations. With that math in mind, the S&P 500 and Nasdaq are waiting for today’s CPI update near record highs, poised to break higher. Many bank analysts are revising their S&P 500 targets upward, some now looking toward 7’000 between this year and next. Signs of stress remain limited, with the VIX index still subdued.

All eyes now turn to today’s CPI report. Headline inflation is expected to tick up to 2.9% from 2.7% a month earlier, while core inflation is seen holding sticky at 3.1% year-on-year. A softer-than-expected set of numbers could fuel bets of a jumbo Fed cut next week to support a weakening jobs market, while stronger-than-expected figures would strengthen the case for the Fed to start with a 25bp cut and follow with two more. In that case, we could see consolidation in 2-year yields and the dollar, and only limited incremental appetite for equities. Option markets imply a 0.7% swing in the S&P 500 on today’s CPI outcome — smaller than the typical 0.9% move for a CPI release and below the move expected for the next jobs report. This suggests investors are assigning more weight to jobs data than inflation, expecting the Fed to prioritize a weakening labour market over tariff-driven price pressures (that haven’t materialized yet).

In FX, the dollar is flat this morning, still below its 50-day moving average, while the EUR/USD consolidates below 1.17 after yesterday’s drop — partly on French political turmoil and a widening 10-year yield spread between French and German bonds. The European Central Bank (ECB) meets today and is widely expected to leave rates unchanged near 2% and reiterate its data-dependent stance. With greater tariff clarity, stronger-than-expected growth and recent upside inflation surprises, the odds of another ECB cut are roughly 50-50. The divergence between slightly more hawkish ECB expectations and a softer Fed outlook supports EURUSD bulls, but widening French–German spreads could limit upside ahead of a closely watched Fitch rating update on France.

Speaking of France, the country was effectively brought to a halt yesterday as people protested against Macron, the divided government, and the budget impasse. Politicians are taking turns proposing their own budget fixes — none likely to pass. Yet, looking at the CAC 40, you’d hardly notice.

The war in Ukraine took an uglier turn after Russia fired drones into Poland this week — an act Warsaw believes was a deliberate test of NATO’s response. Poland shot down the drones, becoming the first NATO country to fire in the Ukraine war, and European capitals are now weighing heavier sanctions against Russia. Oil rallied 1.5% yesterday, but a near 4m-barrel build in US inventories limit gains. Bears point to slowing economies and rising OPEC supply, while bulls focus on a softer dollar and rising geopolitical risks. Support is seen near $62pb, with resistance around $65pb — a key Fibonacci level bracketed by the 50- and 100-DMAs.