Market Cools After Hot Inflation Derails Fed-Cut Optimism

 

On Thursday morning, U.S. equity markets dipped as the latest Producer Price Index (PPI) data came in hotter than expected, pulling the wind out of investors’ sails and casting doubt on aggressive Fed rate cuts later this year. The PPI spiked 0.9% month-over-month in July—a sharp rise compared to the modest 0.2% forecast—and surged 3.3% compared to the same month a year earlier.
This unexpected inflation jolt prompted traders to dial back expectations of Federal Reserve easing, trimming total anticipated rate cuts for the year to about 58 basis points—down from 63. Still, markets continue to price in a 25-basis-point cut in September.
By 9:42 a.m. ET, the decline was clear: the Dow Jones lost 164 points (-0.37%) to hover around 44,758; the S&P 500 slid 0.26% to 6,450; and the Nasdaq edged down 0.10% to approximately 21,690.
Just days ago, softer consumer inflation and signs of cooling in the labor market buoyed hopes of imminent monetary relief from the Fed. Now, rising costs tied to tariffs, in particular, are stoking fears that inflation may no longer be transitory—putting a damper on the recent stock rally that lifted major indexes to fresh records.
The pain wasn’t evenly spread. Materials, small-cap, and housing sectors bore the brunt, all dropping more than 1%. Jobless claims held steady, offering little comfort that layoffs were surging.
Fed insiders joined the caution chorus. San Francisco Fed President Mary Daly pushed back on calls for a 50-basis-point cut, tempering earlier enthusiasm. It followed a suggestion by Treasury Secretary Scott Bessent just a day earlier that such a dramatic move might be on the table.
On the earnings front, Cisco underwhelmed with its guidance, dragging its shares lower. Deere followed suit with a grim profit outlook, while Tapestry sank amid tariff-related concerns. Market breadth skewed negative, with decliners outpacing advancers by roughly 5-to-1 on the NYSE and 3.4-to-1 on Nasdaq. Still, persistence shone through: the S&P notched four new 52-week highs, although none at the lows, while the Nasdaq recorded 24 highs and 31 lows.