S&P 500 reaches a new record high, and gold rebounds strongly on cool inflation readings in the US

Key Takeaways

• US inflation is cooling as July CPI slowed to 3.4% YoY, while core CPI eased to 2.5%, both broadly in line with expectations.

• September Fed hike expectations fell sharply with markets now pricing roughly a 35% probability.

• US stocks reached fresh highs as lower rate-hike expectations supported risk appetite, with the S&P 500 hitting a new record and technology stocks leading the rally.

• Gold broke above $4,400 thanks to softer inflation and lower Fed hike expectations.

• Middle East tensions kept oil elevated with Brent rising roughly 5% during the week.

• Asian markets staged a powerful rebound with the strongest weekly performance in around two months.

Financial markets had a broadly positive week as softer US inflation data reduced expectations for another Federal Reserve rate hike, supporting equities and gold. At the same time, renewed uncertainty surrounding the US-Iran conflict and the Strait of Hormuz kept oil prices elevated and prevented a more decisive improvement in global risk sentiment. Asian equities were among the strongest performers, extending their rebound from the sharp technology-led selloff seen in late July and early August.

• US Inflation Shifts Federal Reserve Expectations

The biggest macroeconomic event of the week was the release of the July US CPI report. Headline inflation slowed to 3.4% year-on-year, from 3.5% in June, matching expectations. Core CPI also came in broadly as expected, rising 2.5% YoY, down from 2.6% previously. While inflation remains above the Feds 2% target, the report provided further evidence that price pressures are not accelerating significantly.

And on Thursday, the July PPI report provided an even more dovish signal. Producer prices were unchanged month-on-month, compared with expectations for a 0.2% increase, while annual PPI inflation slowed sharply to 4.7% from 5.5%. The combination of softer consumer and producer inflation, together with last weeks weak employment report, reduced pressure on the Fed to raise rates in September.

As a result, markets significantly reduced expectations for a September rate hike. The probability fell to around 35% by Friday, compared with roughly 55% a week earlier. The market is therefore increasingly looking toward October or December as the more likely window for any additional tightening.

• US Stock Markets Rose During the Week

The softer inflation figures provided another boost to US equities. Lower expectations for interest-rate increases reduced pressure on Treasury yields and supported technology and growth stocks. The S&P 500 reached a fresh record close on Thursday, breaking 7,800, while the Nasdaq reached 30,000 again.

The key takeaway for equities was that cooler inflation created a more favorable combination of economic resilience and less aggressive monetary policy. However, the market remains vulnerable to a renewed rise in oil prices because a prolonged energy shock could push inflation higher again and force the Fed to maintain a tighter policy stance.

• Outlook for Next Week

The market enters next week with a more constructive risk backdrop, but several important risks remain. The biggest question is whether the combination of softer inflation and weaker labor-market data will be enough to convince the Fed to remain on hold in September. Current pricing suggests that a September hike is becoming increasingly unlikely, but the Fed still has to contend with inflation remaining above target.

For gold, the $4,400 area will remain an important psychological level. A sustained move back above $4,400 could reopen the path toward the $4,450–$4,500 area, while a failure to regain that level could lead to further profit-taking toward $4,350 and potentially lower.

For oil, developments around the Strait of Hormuz will remain the dominant driver. Any progress toward reopening the Strait could trigger a sharp decline in the geopolitical premium, while further attacks, sanctions or a blockade could push crude significantly higher and revive global inflation fears.

For equities, the outlook remains positive as long as inflation continues to cool and AI-related earnings remain strong. However, after the powerful rebound in Asian technology stocks and the S&P 500 reaching another record, valuations and geopolitical risks could encourage some consolidation.

Overall, next week is likely to be driven by the interaction between three forces: softer US inflation and falling Fed-hike expectations, persistent Middle East energy risks, and continued enthusiasm around AI and semiconductor stocks. The biggest threat to the current risk-on environment would be a renewed surge in oil prices, because it could quickly reverse the improvement in inflation expectations that markets celebrated this week.

• Major Economic Calendar Events for the Upcoming Week