Weekly market wrap

Mixed inflation, softer jobs keep Fed on rate-cut path

Key takeaways

• Markets received highly anticipated updates on inflation that showed mixed readings for August. CPI inflation was about in line with expectations, rising to 2.9% annualized. Meanwhile, producer price inflation resumed its trend lower, falling to 2.6%. In combination, inflation is elevated but appears generally contained, though tariffs could drive price pressures.
   
• Downward revisions to job gains and higher initial jobless claims added to the recent trend of data pointing to a softening labor market. Despite inflation remaining above the Fed's 2% target, we expect the Fed to cut rates on September 17 in support of its maximum-employment mandate.
   
• Markets are pricing in a faster pace of easing than the Fed's own projections, which will be updated at the September meeting. Investors will likely look for signs that could point to deeper rate cuts ahead.
   
• Bond yields dropped on expectations of Fed easing, with the 10-year Treasury yield briefly touching 4.0%, matching the lows for the year reached in April. Lower rates should reduce borrowing costs for individuals and businesses, in our view, which would be supportive of the economy and corporate profits. Lower discount rates should help benefit equity markets near record highs with elevated valuations.

Highly anticipated CPI report was about in line with expectations

Markets were closely watching this past week's consumer price index (CPI) report, looking for any potential impact on the Fed's September meeting. The report showed that CPI inflation increased to 2.9% annualized in August, as expected, from 2.7% the prior month¹. Energy prices edged up 0.7% month-over-month, led by a 1.9% gain in gasoline, serving as key drivers to the uptick of headline inflation¹. Core CPI, which excludes more-volatile food and energy prices, matched forecasts to hold steady at 3.1%¹.

We expect tariffs to put some additional pressure on inflation, as higher import costs are at least partially passed along to consumers. However, most of this impact should be near-term price hikes that aren't a persistent driver of inflation, in our view. While inflation remains above the Fed's 2.0% target, we expect the Fed to cut rates to help support the slowing labor market. 

Producer price inflation resumed trend lower

Producer price index (PPI) inflation fell to 2.6% annualized in August, well below estimates calling for an increase to 3.3%¹. Trade services inflation, down 1.7% month-over-month¹, was a key contributor to the drop, likely reflecting narrowing margins for wholesalers and retailers. Core PPI inflation dipped to 2.8% year-over-year, also significantly cooler than forecasts for 3.5%¹. These readings returned wholesale inflation to its uneven trend lower this year, shown below.
 

Tariff-related price hikes remained contained through August, as firms across the supply chain appear to absorb higher costs. While price pressures are expected build over the coming months, these cooler PPI inflation readings should help keep consumer prices contained, in our view.

Labor market shows further signs of cooling

Following the last two monthly employment reports showing job gains well below estimates and downward revisions to prior months, the U.S. Bureau of Labor Statistics released its quarterly census of employment and wages (QCEW). The release reflected 911,000 fewer jobs for the 12-month period through March 2025 than previously reported, compared with forecasts for 800,000 fewer jobs¹. This downward revision indicates that initial employment reports overestimated job gains, meaning job growth has been slower than previously thought.

Initial jobless claims added to the recent trend of data pointing to a softening labor market, rising to 263,000 this past week. The reading was the highest in four years and well above forecasts for a pullback to 231,000¹. Continuing claims, which measures the total number of people receiving benefits, held steady at 1.94 million¹. As shown in the chart below, the jobless claims and the unemployment rate have trended higher this year. 
 

While demand for labor has declined, the unemployment rate appears to remain contained at 4.3%, well below the historical average of 5.7%¹. There is also evidence that labor supply as fallen¹, likely driven by tighter immigration enforcement and demographics of the aging workforce. As a result, the labor force participation rate, which measures the proportion of the civilian population that is employed or actively looking for work, drifted lower to 62.3% in August, from 62.7% a year ago¹. This adds to a broader trend that has continued for more than two decades¹. While this means fewer jobs are likely needed to balance the labor market, we expect the Fed to act to help ensure the softening labor market doesn't lead to a downturn in the economy. 

Fed likely to resume easing to help support labor market

Despite inflation remaining above the Fed's 2.0% target, the central bank appears poised to resume interest-rate cuts for the first time this year, in support of its maximum-employment mandate. This month, the Fed will also update its quarterly economic projections for the fed funds rate, unemployment, inflation and economic growth. The June projection showed the fed funds rate dropping to 3.6% by the end of next year. Illustrated in the chart below, bond markets are pricing in a faster pace of easing, with fed funds falling below 3% over the same timeframe.

Markets will likely look for any update to the fed funds forecast — known as the “dot plot” — that could point to accelerated easing to help support the labor market. We expect the Fed to ease one or two times this year, followed by an additional one or two cuts next year, likely bringing the fed funds rate down to the 3% - 3.5% range.

Bond yields moved lower this past week, with the benchmark 10-year Treasury yield briefly touching 4.0%, matching the lows for the year reached in April¹. Lower yields have driven solid fixed-income performance. U.S. investment grade bonds — which we believe should serve as the foundation of the fixed-income portion of portfolios — have generated 6.5% returns this year, well above their 4.9% average yield to start the year¹.

As the Fed likely cuts rates in the months ahead, short-term Treasury yields — particularly those on T-bills — should drop along with the fed funds rate. However, we think the yield curve has room to steepen toward historical averages, potentially offsetting falling short-term yields. We expect the 10-year Treasury yield to stay in the 4.0%–4.5% range, as inflation uncertainty and deficit concerns likely prevent yields from falling much further. Fed rate cuts should help keep yields contained to the upside, in our view.

Portfolio positioning 

While the labor market appears to be softening, we expect the economy to stabilize and potentially reaccelerate in the months ahead, supported by tailwinds of fiscal stimulus, monetary-policy easing, and deregulation. With major stock indexes hovering near record highs and valuation by some measures elevated, markets could experience volatility ahead. We suggest investors use potential pullbacks as opportunities to invest at better prices or rebalance to maintain diversification.

We continue to favor U.S. large- and mid-cap stocks, particularly quality and more cyclical stocks that could benefit from a potential broadening of market leadership beyond mega-cap technology. We expect the relative strength of the U.S. economy, elevated but contained inflation, and higher interest rates to help support the value of the U.S. dollar, potentially weighing on international large-cap stocks, for which we recommend an underweight allocation.

From a sector perspective, we recommend overweight positions in consumer discretionary, financials and health care. The consumer discretionary sector could continue to recover, supported by reduced tariff uncertainty and lower tax rates. Financial companies could benefit from less exposure to tariffs and the potential for a steeper yield curve as the Fed eases. Health care stocks trade at a discount to the broader market, likely reflecting the sector's challenges, but also offering the opportunity for valuation expansion.

Within fixed income, international bond yields have risen in recent months, due in part to concerns with government debt. Slowing economic growth and higher defense spending, particularly in Europe, have added to government budget deficits. Despite falling Treasury yields, U.S. bonds continue to offer higher rates than international bonds. Many international central banks are likely near the end of their rate-cutting cycles, which would limit the potential for bond price appreciation driven by lower short-term yields. Overall, we suggest an underweight allocation to international bonds.

As we go into the last months of the year, your financial advisor is a great resource to help ensure your investments are aligned with your goals, time horizon and comfort with risk. This can assess whether you are on track to achieve your financial goals.
 

Weekly market stats

^{Source: 1. FactSet}

^{Source: Factset, (9/12/2025). Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *Morningstar Direct (9/14/2025)}

The week ahead

The Federal Reserve meeting will be the big event this week, with markets also likely to watch export/import price data, retail sales and housing market indicators closely.  

Review last week's weekly market update.