Before the bell

Market Highlights

• Inflation Report: The Consumer Price Index (CPI) for August rose by 2.5% year-over-year, its lowest level since February 2021, while the core CPI held steady at 3.2%, aligning with expectations. These figures confirmed that inflation continues to moderate, reinforcing expectations that the Federal Reserve would start its rate-cutting cycle soon.

• Interest Rates: The 10-year Treasury yield moved lower to around 3.66%, significantly down from its April highs of about 4.7%. The bond market appeared to price in the likelihood of multiple rate cuts by the Fed over the next 12 months, potentially easing borrowing costs for both businesses and consumers.

• Labor Market: Softer-than-expected labor market data revealed that nonfarm payrolls in August rose by 142,000, falling short of the expected 160,000. However, the unemployment rate ticked down to 4.2% from the previous month’s 4.3%. Despite the cooling, labor market conditions remained generally supportive of household consumption.

• Fed in Focus: All eyes turned to the Federal Reserve's meeting scheduled for next week, with a 73% probability of a 0.25% rate cut being priced into futures markets. Markets anticipated that the Fed would signal the start of an extended rate-cutting cycle, shifting its focus from inflationary pressures to the slowing labor market.

Notable Earnings

• Oracle Corporation: Oracle reported mixed results, with a slight miss on its revenue estimates despite seeing solid growth in its cloud services segment. The company cited strong demand for cloud infrastructure and applications, yet expressed caution regarding potential impacts from global economic headwinds. The stock experienced some volatility post-earnings due to concerns over slowing momentum in its core cloud business.

• Adobe Inc.: Adobe exceeded market expectations, delivering robust earnings driven by its Creative Cloud and Document Cloud segments. The company highlighted strong customer adoption of its new AI-powered tools, which contributed to an increase in subscription revenue. However, Adobe also signaled a cautious outlook for the next quarter, pointing to potential slowdowns in digital marketing spending.

• FedEx Corporation: FedEx reported a better-than-expected quarterly profit, attributing its performance to cost-cutting measures and pricing strategies. Despite the positive earnings, FedEx projected a softer outlook for the upcoming quarter due to slowing global shipping demand and rising operational costs, particularly in fuel and labor. The company plans to focus on efficiency improvements to navigate these headwinds.

• Lennar Corporation: The homebuilder posted strong earnings, with revenue boosted by increased home sales despite the challenging housing market. Lennar emphasized its ability to manage construction costs effectively while meeting demand in a market characterized by tight inventory and rising mortgage rates. The company remains optimistic about future growth but acknowledged that potential rate hikes could impact buyer sentiment.

• Darden Restaurants: The parent company of Olive Garden and LongHorn Steakhouse reported earnings that beat expectations, driven by strong same-store sales growth. Despite inflationary pressures and increased food and labor costs, Darden managed to maintain profitability through strategic menu pricing and cost control measures. The company expressed confidence in continued growth, supported by ongoing customer demand for dining experiences.

Core Inflation: Last 4 Years

The graph illustrates the year-over-year percentage change in core inflation over the last four years, highlighting a notable shift in inflationary trends. Starting from a stable rate around 2% in August 2020, core inflation experienced a sharp increase, peaking at 6.3% around mid-2022. This significant rise indicated mounting inflationary pressures in the economy. However, since that peak, there has been a marked downward trajectory, showing "significant progress" as core inflation declined to 3.2% by mid-2024. Despite this progress, the graph underscores that more effort is needed to reach the Federal Reserve's target, which is represented by the dashed line at the 2% level. This suggests that while the recent decline in inflation is promising, policymakers still have challenges ahead to achieve their long-term inflation goals.

Outlook Snapshot: The Week Ahead

With inflation data and interest rate decisions taking center stage, the coming week promises to be action-packed. The Federal Reserve’s policy meeting will be the key focus, with markets largely expecting a 0.25% rate cut as part of an extended, albeit measured, easing cycle. Expectations are that the Fed will likely avoid more aggressive cuts, aiming instead for a balanced approach to ensure the labor market and broader economy remain stable. Additionally, investors will monitor the latest inflation readings, with headline CPI projected to rise by 2.6% and core CPI expected to stay unchanged at 3.2%. Meanwhile, producer price index (PPI) data set to release later in the week will give further insights into the inflation trend. Sector-wise, attention will turn to whether the rotation away from mega-cap technology stocks persists and if other sectors like utilities and industrials continue to show strength. In this context, the market's ability to maintain its recent gains could depend heavily on how well economic data aligns with the narrative of a cooling yet resilient growth environment.