Federal Reserve rate cut expectations surged Friday after a tamer U.S. inflation report for September injected optimism into markets and powered a broad rally. Traders are now betting on a Federal Reserve rate cut at the October meeting, scheduled for later this week, with another move likely in December if growth holds steady and prices keep easing.
Key Points
The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each gained about 2% on the week, with the Dow closing above 47,000 for the first time. The upside followed fresh evidence that price pressures are not surprising to the upside anymore and a robust earnings season that has far outpaced typical beat rates.
Of companies that have reported so far, 87% topped Wall Street’s estimates, well above the historical ~67% beat rate, according to LSEG. If Big Tech results this week clear a high bar and management teams issue constructive guidance, strategists say the tape could challenge recent highs.
Yet the optimism has a caveat. New trade frictions and a partial data blackout tied to the U.S. government shutdown may limit how confident investors can be about the economic trajectory heading into year-end.
Federal Reserve rate cut bets surge after September CPI
Futures pricing reflected an almost certain Federal Reserve rate cut this week after the latest U.S. inflation report came in below expectations on both the monthly and annual readings. The consumer price index rose 0.3% in September, placing the annual rate at 3.0%. Economists polled by Dow Jones had expected 0.4% month over month and 3.1% year over year.
That gap—small but meaningful—was enough to extend a rally already fueled by strong corporate profits. “Inflation might not be slowing but it’s not surprising to the upside anymore,” said David Russell, global head of market strategy at TradeStation. His view mirrors a market leaning toward a Federal Reserve rate cut as policymakers seek to balance progress on inflation with signs of moderating growth.
The headline CPI did edge up from 2.9% in August to 3.0% in September, a reminder that disinflation can be bumpy. Still, with the trend broadly improving and longer-term inflation expectations contained, the case for a Federal Reserve rate cut has strengthened in the eyes of traders who see room for the Fed to fine-tune policy before year-end.
Markets rally on cooler prices and robust earnings
- Weekly gains: S&P 500, Nasdaq Composite, and Dow up about 2% for the week
- Milestone: Dow closes above 47,000 for the first time
- Europe: Pan-European Stoxx 600 adds 0.23%, reversing earlier losses
- Futures: U.S. stock futures moved higher Sunday evening
Earnings remain the backbone of the move. With 87% of reporters beating estimates so far, the breadth of upside surprises is notable. The beat rate—well above typical levels—has been most pronounced in tech, services, and select consumer names, creating a supportive backdrop ahead of heavyweight reports.
What to know now:
- Markets now price an October Federal Reserve rate cut and a December follow-up, contingent on data and guidance
- CPI: 0.3% month over month, 3.0% year over year vs. 0.4% and 3.1% expected
- Big Tech: Five of the “Magnificent Seven”—all but Tesla and Nvidia—report this week
- Data gaps: The jobs report and other releases are delayed due to the government shutdown
How a Federal Reserve rate cut path intersects with tariffs and trade risks
Sentiment faces a new test on trade. President Donald Trump announced an additional 10% tariff on Canada on Saturday, raising general duties to 45%. The move followed tensions over an Ontario ad featuring Ronald Reagan criticizing tariffs; Ontario said it would stop the ad after the first two games of the World Series.
Tariffs could influence near-term inflation dynamics. Economists have warned that new levies can push up imported costs, particularly on consumer-facing categories. If inflation re-accelerates because of trade frictions, it could complicate the calculus for a Federal Reserve rate cut, even as recent data favor a more accommodative stance.
For markets, a Federal Reserve rate cut is supportive for valuations, credit conditions, and risk appetite, but any reemergence of price pressure from tariffs may limit the Fed’s flexibility. Investors are watching closely for how policymakers frame these crosscurrents in their post-meeting statement and press conference.
Trade diplomacy watch: ASEAN outcomes and a potential Trump–Xi reset
There were glimmers of progress at the ASEAN Summit, where top U.S. and Chinese officials met Sunday. U.S. Treasury Secretary Scott Bessent described the outcome as “a very successful framework” for talks between President Trump and President Xi Jinping. Trump also announced agreements with four Southeast Asian countries, signaling a broader push to stabilize trade ties across the region.
The diplomatic calendar intensifies at month-end. The White House said Trump will meet China’s Xi on October 30 on the sidelines of the Asia-Pacific Economic Cooperation Summit. It would be their first in-person meeting of Trump’s second term, with a delicate trade detente set to expire November 10 without another extension. Investors will listen for any concrete steps to reduce friction, reopen channels, or set timelines for deeper talks.
Earnings on deck ahead of the Federal Reserve rate cut decision
This is a packed week. Five of the “Magnificent Seven” report, excluding Tesla and Nvidia. Strong top-line growth, resilient margins, cloud demand, and AI-driven productivity gains are in focus, along with 2025 spending plans. Guidance will be crucial for gauging whether margins can hold as wage costs normalize and input prices settle.
The Fed convenes later this week with the market primed for action. Whether the Fed delivers a one-and-done Federal Reserve rate cut or signals a two-step sequence into December will be pivotal for rate-sensitive sectors, including housing, small-cap credit, and parts of consumer discretionary.
Even with Friday’s upbeat tone, breadth and leadership remain key watchpoints. If Big Tech beats and raises guidance, the case for new highs improves. If results are mixed, a positive surprise from the Fed could still keep risk assets supported—especially if policymakers emphasize flexibility and data dependence.
What the pros are saying
“Inflation might not be slowing but it’s not surprising to the upside anymore,” said TradeStation’s David Russell. To investors, that nuance matters. A stable inflation backdrop paired with a measured Federal Reserve rate cut could help extend the cycle, provided growth remains intact and trade frictions do not escalate.
Bond markets, meanwhile, are bracing for volatility around the decision and the statement. With limited fresh data because of the shutdown—most notably the missing jobs report—rate-setters are likely leaning more on high-frequency indicators, corporate commentary, and market-based inflation expectations.
Global cues
European equities stabilized, with the Stoxx 600 up 0.23% into the weekend. U.S. futures ticked higher Sunday evening, reflecting optimism that the CPI surprise and earnings momentum can carry into the week. Currency markets have been orderly, though any escalation in trade measures could quickly affect the dollar, commodity-linked FX, and cross-border flows.
Risks to watch
- Tariffs: Higher import costs could lift near-term inflation and complicate a Federal Reserve rate cut path
- Data gaps: The shutdown reduces visibility, raising the odds of market overreactions to limited releases
- Earnings: Guidance and commentary on demand, pricing, and inventories will set the tone for Q4
- Policy communication: Small changes in wording around inflation risks or growth can shift rate expectations
The bottom line
Cooler prices, strong profits, and constructive diplomacy created a window for risk assets to climb, capped by the Dow’s first-ever close above 47,000. Markets are leaning toward a Federal Reserve rate cut this week and a possible follow-up in December, a stance that aligns with recent inflation and earnings trends.
Tariffs and data delays temper the outlook, but they do not erase it. If Big Tech delivers and trade talks make incremental progress, stocks could press higher into year-end. For now, a Federal Reserve rate cut remains the base case for traders looking for a softer landing and steadier financial conditions as 2025 approaches.
FAQ’s
What is a Federal Reserve rate cut, and why did cooler CPI boost the odds?
A Federal Reserve rate cut lowers the target fed funds rate. September CPI came in at 0.3% month over month and 3.0% year over year (vs 0.4% and 3.1% expected), easing inflation worries and lifting the probability of a cut.
When is the next Federal Reserve meeting, and are markets expecting a Federal Reserve rate cut?
The Fed meets this week in October. Futures pricing points to a high likelihood of a rate cut, with markets also leaning toward another move in December, pending incoming data and guidance.
Could new U.S. tariffs on Canada affect inflation and the Fed’s path?
An additional 10% tariff can raise import costs and consumer prices, which may complicate the timing and size of any Federal Reserve rate cut. Investors are watching trade talks and the anticipated Trump–Xi meeting for clues.
Article Source: CNBC
Image Source: Pixels
