U.S. August CPI Meets Expectations at 2.9%, 10-Year Treasury Yield Drops Below 4%

TradingKey - The U.S. August Consumer Price Index (CPI) posted its largest year-on-year gain in seven months, but the reading was broadly in line with expectations. Combined with recent surprisingly weak employment data, a 25-basis-point rate cut by the Federal Reserve in September is now all but certain, pushing the 10-year Treasury yield below 4% for the first time since April.

On Thursday, September 11, the U.S. Bureau of Labor Statistics reported:

• Headline CPI YoY: +2.90%, matching consensus and up from 2.70% in July
• CPI MoM: +0.40%, above the 0.30% forecast and prior 0.20%

U.S. CPI Year-on-Year, Source: TradingKey

Excluding volatile food and energy categories:

• Core CPI YoY: +3.10%, unchanged from the previous month and in line with expectations
• Core CPI MoM: +0.30%, also consistent with forecasts

Bloomberg economist Ira Jersey said the report effectively locks in a 25-bp rate cut next week, with growing odds of additional cuts in October and December.

Following the release, traders increased bets on two more Fed rate cuts in 2025. The 10-year Treasury yield dropped below 4% for the first time in nearly five months, the Dollar Index fell 50 pips, and major non-U.S. currencies — euro, pound, yen — rose broadly.

Also released alongside CPI was a key labor market indicator: Initial jobless claims for the week ending September 6: 263,000, the highest since late October 2021, far exceeding the 235,000 forecast

Tiffany Wilding, economist at Pimco, said we are getting what we expected on inflation. The more concerning news from the data this morning is a jump in claims.

“It has been relatively contained, despite the labor market really slowing to a halt over the last year. And now the jump in claims today looks a little more concerning. We are moving out of a period of very little activity or very little hiring or firing, to potentially some more separations. That is going to be super concerning for the Federal Reserve.”

This data aligns with recent signs of cooling in the labor market, including softer JOLTS job openings, weak ADP employment figures, and the disappointing August nonfarm payrolls. Against this backdrop of weak job growth and contained inflation, the bar for Fed easing has been significantly lowered.

While lower rates can provide liquidity support to an all-time-high U.S. stock market, concerns remain that a weaker economic backdrop could undermine investor confidence. 

After the CPI release, S&P 500 futures pulled back from intraday highs, reflecting this caution.