By Rita Nazareth
(Bloomberg) — Wall Street saw a relief rally as cooler-than-estimated inflation reinforced trader conviction the Federal Reserve will cut rates next week.
Equities extended their October advance, with the S&P 500 hitting all-time highs on bets policy easing will keep fuelling corporate earnings. While the reaction in Treasuries was more subdued, money markets continued to priced in a high likelihood of two rate reductions before the year is over.
The slowest pace in the three months for underlying inflation was a welcome surprise for traders, flying almost blind amid the dearth of economic data since the start of the U.S. government shutdown. The September core consumer price index increased 0.2% from August. On an annual basis, it advanced 3%.
While the central bank was already widely expected to lower borrowing costs at its meeting next week, the CPI report may help convince policy-makers that they can do so again in December.
“Good news on a Friday!” said Art Hogan at B. Riley Wealth. “This report will clearly keep the Fed on track to cut rates at its next meeting. The Fed has been clear that they are more focused on the softening labour data and will continue to defend their full employment mandate, even with core CPI well above their 2% target.”
Separate data showed U.S. consumer sentiment fell in October to a five-month low, as worries persisted about stubbornly high prices and the impact on their finances.
The S&P 500 rose almost 1%. The yield on two-year Treasuries was little changed at 3.48%. The dollar wavered.
“There was little in today’s benign CPI report to ‘spook’ the Fed and we continue to expect further easing at next week’s Fed meeting,” said Lindsay Rosner at Goldman Sachs Asset Management. “A December rate cut also remains likely with the current data drought providing the Fed with little reason to deviate from the path set out in the dot plot.”
The cooler-than-expected CPI confirms what we’ve seen overall from private data during the government shutdown — little indication that inflation is surging or that the labour market is falling off a cliff, according to Ellen Zentner at Morgan Stanley Wealth Management.
“For a Fed focused on prudent ‘risk management,’ that should translate into another rate cut next week, and likely more to follow,” she said.
To Bret Kenwell at eToro, it would have taken a shockingly bad report to derail an October rate cut, but at a time where economic data is a bit sparse, investors will take any clarity they can get.
Kenwell also noted that while we may in fact get two more rate cuts this year, the Fed will struggle to justify a more aggressive rate-cutting approach in the face of stubbornly high inflation — unless there’s persistent and notable weakness in the labour market.
“Regardless, stocks can do well in a mild inflationary environment, as we have seen over the past few years. For that to continue, we’ll need to see strong earnings, and so far this earnings season, that’s been the case,” he said.
“Much like a Sherlock Holmes’ story, inflation is the dog that didn’t bark,” said Chris Zaccarelli at Northlight Asset Management. “So many people have been expecting a sharp increase in inflation and have positioned bearishly as a result, but the market is likely to keep squeezing the shorts until they realize that the economy – and Corporate America – is more resilient than many expected.”
Zaccarelli also noted that while valuations are high and there are risks in the market, with the Fed cutting rates and corporate profits continuing to increase, it’s hard to see an interruption of this year’s bull market.
“Next year will bring new challenges, but we wouldn’t advise getting in the way of the upward trend between now and year-end,” he said.
More Comments on CPI:
- Florian Ielpo at Lombard Odier Asset Management:
The data confirms that US inflation remains sticky, but is gradually fading, reinforcing the case for multiple Fed rate cuts into next year.
- Ian Lyngen at BMO Capital Markets:
Overall, the inflation figures for September locked in a 25 basis-point cut next week and will likely result in a “dovish cut” tone. We suspect that a December cut is also cemented by this print given that the government shutdown is an ongoing factor.
- Eric Teal at Comerica Wealth Management:
Inflation is staying contained at this point. The impact from tariffs has been felt mostly felt in lower end consumption imports. The tariff effects will probably increase the longer they remain in place. However, the current inflation report combined with a weaker job market provides cover for additional rate cuts in 2025 and into next year.
- Scott Helfstein at Global X:
Nothing in the inflation print should stop the Fed from cutting rates next week. Yes, prices are higher, but not enough to keep them from helping the economy.
The delayed inflation report was not great, but not bad enough to stop the Fed from cutting. Prices have been reasonably stable outside utilities and used cars despite tariffs. US consumers do not like higher prices, but are still eating out.
- John Kerschner at Janus Henderson:
Like an oasis slaking the thirst of a weary desert traveler, today’s CPI number offered investors the first tidbit of information from the barren wasteland of government data that has existed since the shutdown started Oct 1. Investors were not disappointed. Inflation came in softer than expected, leading to a tepid bond market rally, and ensuring that the Fed will cut rates at next week’s Open Market Committee meeting.
While investors may have expected a more robust rally given the data, concerns abound in some corners that these numbers are less robust than normal, due to the shutdown. In fact, given the dearth of government data, market players are singularly focused on what is coming out of Fed governors’ mouths, and as of right now, it’s a preponderance of dovish speech. While this may change once the calendar flips to 2026, for the present, the market is predicting 100% chance of another rate cut in December and further bond rallies, notwithstanding the still difficult inflation environment.
Today’s numbers help the Fed’s narrative that at least inflation is mostly moving in the right direction. Right now, the markets are seemingly giving the Fed a pass to cut rates through the end of 2025.
- Josh Jamner at ClearBridge Investments:
Today’s soft CPI release locks in a rate cut at the Fed’s meeting next week.
While signs of tariff-induced inflation are apparent in select categories such as apparel and furniture, goods prices increased at a slower pace in September than August broadly. This suggests that the pass-through of higher tariffs to consumers has continued to undershoot expectations, which in turn has opened the door for the Fed to lower rates to support a cooling labour market.
- Steve Wyett at BOK Financial:
When the markets are hungry for data, any tidbit might look like fine dining. Such is the case as we awaited the delayed CPI report to consider what, if any impact it might have on the Fed’s decision next week. The expectation is for the Fed to cut rates, so it would take a material upside surprise to alter course.
The Fed will cut next week and in a welcome development, we have seen longer term rates, including home mortgage rates, decline of late. The bigger picture remains a question, but inflation will not stand in the way of the Fed at the moment.
- David Russell at TradeStation:
This keeps the Fed on track for a cut next week and will likely make policymakers lean more dovish going forward.
- Chris Zaccarelli at Northlight Asset Management:
Much like a Sherlock Holmes’ story, inflation is the dog that didn’t bark. So many people have been expecting a sharp increase in inflation and have positioned bearishly as a result, but the market is likely to keep squeezing the shorts until they realize that the economy – and Corporate America – is more resilient than many expected.
We understand that valuations are high and there are risks in the market, but with the Fed cutting rates – and this report does nothing to stop them from a 25-bps cut next week – and corporate profits continuing to increase, it’s hard to see an interruption of this year’s bull market.
Next year will bring new challenges, but we wouldn’t advise getting in the way of the upward trend between now and year-end.
- Jeffrey Roach at LPL Financial:
Tariffs were likely the culprit for rising apparel prices in September. We learned from the Beige Book that some firms facing tariff-induced cost pressures kept their selling prices largely unchanged to preserve market share and in response to pushback from price-sensitive clients. Inflation metrics will likely improve by December, setting the Fed up to continue easing throughout 2026.
- Skyler Weinand at Regan Capital:
Inflation coming in weaker-than-expected further solidifies a continuation of the Federal Reserve’s rate cutting cycle, at least for the next two meetings. We expect at least two 25 basis point cuts to end 2025 and for the Fed to take a slight pause to review a few months of data before cutting again in 2026.
Market sentiment was also helped by a White House announcement that President Donald Trump will meet his Chinese counterpart Xi Jinping, a chance for cooler heads to prevail after a recent flare-up in trade tensions.
Other trade conflicts continue to simmer, however. Trump said he would immediately halt all trade negotiations with Canada, citing a Canadian advertisement against his signature tariffs plan featuring the voice of former President Ronald Reagan.
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.8% as of 9:59 a.m. New York time
- The Nasdaq 100 rose 1%
- The Dow Jones Industrial Average rose 0.9%
- The Stoxx Europe 600 was little changed
- The MSCI World Index rose 0.7%
- Bloomberg Magnificent 7 Total Return Index rose 0.6%
- The Russell 2000 Index rose 1.6%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.1627
- The British pound was little changed at $1.3338
- The Japanese yen fell 0.2% to 152.83 per dollar
Cryptocurrencies
- Bitcoin rose 1.3% to $110,945.01
- Ether rose 3.1% to $3,947.89
Bonds
- The yield on 10-year Treasuries was little changed at 4.01%
- Germany’s 10-year yield advanced five basis points to 2.63%
- Britain’s 10-year yield was little changed at 4.43%
- The yield on 2-year Treasuries was little changed at 3.48%
- The yield on 30-year Treasuries advanced two basis points to 4.60%
Commodities
- West Texas Intermediate crude rose 0.5% to $62.08 a barrel
- Spot gold fell 0.5% to $4,107.22 an ounce
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Last modified: October 24, 2025
