Markets Weekly Outlook - S&P 500, Nasdaq & Dow Jones on a Tear as Fed Rate Cut Looms

[Ben Graham]

Week in Review - Equities with Fresh All-Time Highs

Another inflation print from the US and focus still remains on the labor market where unemployment claims saw a significant spike this week. This leaves the Fed in a position where anything but a rate cut next week could send markets spinning.

Inflation data this week did flash some warning signs. Looking at the data, tariff driven price pressure leaks through the economy, though it looks different across categories. Food prices seem to climb a bit, while many non‑essential items are easing. Yet the worry for a typical Fed watcher is not the direct cost of imported goods. It is more about the rise in service costs that come from inside the country. Take the index for services excluding energy. In August it sat at three point six percent. Services less shelter were higher, around four percent. Both numbers sit well above the two percent goal Fed constantly cites.

At the same time, the producer‑price data released yesterday showed a weaker jump than analysts expected. Those weak spots feed into personal consumption expenditure measures, which the Fed prefers for inflation. That filter mostly points to higher pressure, not relief. When you line up the latest CPI release, math points toward a core PCE near three percent for August. “Supercore” PCE appears to sit above three point three percent, edging past peaks seen in February 2025 and December 2024, months when the Fed paused rate cuts.

If this pattern holds, the central bank may have to rethink its easing path in the near term. Or perhaps the service surge could soften later, giving policymakers breathing room.

However, despite the inflation concern Fed Chair Powell faces political pressure as well as growing concerns about the US labor market. Given Fed Chair Powell's Jackson Hole speech where he practically confirmed that labor market data is currently the major factor rather than inflation. However, can the Fed ignore the signs?

Consumer Confidence Plummets Amid Economic and Inflation Worries

Consumers are growing more pessimistic about the economy, with a key measure of sentiment falling to a four-month low in September. The decline was sharper than expected, driven by widespread concerns about rising risks to business conditions, the job market, and persistent inflation.

The University of Michigan’s consumer sentiment index dropped to 55.4 this month. This was a notable slide from the previous month’s reading and came as a surprise to economists, who had anticipated only a slight dip. The worsening sentiment was particularly strong among lower- and middle-income groups, highlighting the economic pressure on these households.

The report revealed that consumers' views on their own personal finances are declining, with a gloomier outlook for both their current situation and future expectations. Looking at the specifics, a gauge of how consumers feel about current conditions slipped, but the biggest drop came from the barometer of their expectations for the future, which fell sharply.

Consumers are also growing more concerned about long-term price increases, as long-run inflation expectations rose for the second consecutive month, climbing to 3.9% in September.

Stock Surge Continues

The S&P 500 and Nasdaq continued their impressive performance and pushed up to new record levels, mainly thanks to a jump from Microsoft. Investors seemed to be eyeing the Federal Reserve’s meeting next week, where many think a rate cut could happen because the jobs market looks slower.

The Dow Jones fell a bit, while the S&P barely rose after a big rally the day before that lifted all three indexes to historic peaks.

People are really focused on the Fed’s session on Tuesday and Wednesday. Some analysts think the bank may trim rates by 25 basis points, especially as jobs data dominate the Fed agenda and concerns.

Source: LSEG

The Week Ahead

Asia Pacific Markets - Japan and China in Focus

The Bank of Japan will probably keep the interest rate the same this week. Exports have been slipping, maybe because US tariffs are still biting. Imports could drop too, since global commodity prices seem to be falling. Because exports stay weak, the BoJ may leave its 0.5% policy rate unchanged on Friday in my opinion.

The bank still needs some time to see how new US‑Japan trade deal works out. Consumer price numbers are likely to ease to about 2.9% year‑over‑year in August, thanks to last year’s high base. Core inflation, which leaves out food and energy, might stay above 3%, which could help a rate rise in October. Governor Ueda won’t say anything hawkish, given the fluid political scene. Some analysts think the weak export data could hurt consumer confidence, which may slow growth.

China will publish its August numbers on Monday. Retail sales are expected to bounce back, around 4% higher than a year ago. At the same time, industrial output probably keeps slipping, perhaps down 5.6% year‑over‑year. Fixed‑asset investment may also fall, about 1.5% down so far this year.

Housing price data from about 70 cities should show that the downtrend has continued for a few months. Poor weather was often blamed for the weak July figures. Therefore, August’s data will be a key test to see if the slowdown was just a blip or a longer trend.

Federal Reserve, Bank of England (BoE) and Bank of Canada (BoC) in Focus

The Fed meeting on Wednesday gets our attention. Inflation still feels high, but the job picture may be getting worse. Over the last four months we have only seen modest job growth, and a recent revision even hints that more than half of the jobs reported added by March weren’t real. That suggests the labor market is softer than it first seemed.

A cooler economy and a weaker jobs market could ease the price pressure that comes from tariffs. The Fed therefore might move away from its “somewhat restrictive” stance toward a more neutral stance. According to LSEG data, there is 95% probability of a 25‑basis‑point cut, pulling rates down toward 3.25% by March, down from the current 4.5% ceiling.

Retail sales data, due Tuesday, looks likely to stay low because consumers feel uneasy and car sales keep dropping. Industrial output could still shrink again, as the latest manufacturing survey points to another dip.

The jobs market feels like a wild card for the Bank of England.

We will be watching payroll numbers for any sign of weakness.

Recent surveys have been getting better, which may mean the worst is over, but the autumn could still bring risk.

Also we need to see if wage growth is finally easing.

Looking at the UK and Inflation data due Wednesday is another focus.

The BoE is especially nervous about food prices, and those numbers are likely still to sit above five percent. Services inflation, on the other hand, might inch lower. If that happens, the report probably won’t shift the Bank’s plan for cutting rates. I still expect a cut in November, although a big surprise on inflation could make us rethink that view.

On Thursday the Bank is not expected to cut rates. Historically it likes to cut only once per quarter and it already cut in August.

Even a change in forward guidance looks unlikely in my opinion. Even though the Central Bank has hinted at more cuts, that hint may simply show rates are edging toward a potentially neutral level.

The Bank of Canada may cut rates by about 25 basis points soon. Canada’s economy is tied closely to President Trump’s tariffs, moreover production dropped in the second quarter. It may mean that demand from the US weakens, which could linger. Jobs numbers slipped again in August, pushing unemployment up to roughly 7.1 %.

Inflation sits near the target, in conclusion the central bank could push rates toward the low end of the so‑called neutral range. Therefore I think another cut could happen in the fourth quarter.

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Chart of the Week - US Dollar Index (DXY)

This week's Chart of the week is the US Dollar Index (DXY).

The DXY remains under pressure but has thus far remained above the YTD low which was printed in July.

The question for many in the week ahead will be whether a rate cut will lead to a fresh yearly low?

While this is possible, it does appear that markets have already priced in the majority of a 25bps rate cut. This means that we could be in for a DXY rally this week.

This of course is my opinion and could change if the Fed issue a dovish outlook or if Fed Chair Powell hints at more aggressive rate cuts moving forward.

Immediate support rests at 97.13 before 96.90 and YTD low around the 96.38 handle come into focus.

A move higher for the Index faces a significant confluence area around the 98.50 mark. Beyond that the 99.50 and 100.00 areas come into focus.

US Dollar Index (DXY) Daily Chart - September 12, 2025

Source: TradingView.Com (click to enlarge)

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