Markets are overlooking a higher-than-expected inflation report and are instead focusing on the latest indications that the U.S. labor market is weakening — a shift that signifies growing worries about a potential economic downturn.
Consumer prices increased slightly more than anticipated in August, according to CPI data released Thursday by the U.S. Bureau of Labor Statistics. The overall rate of 2.9% and the core rate of 3.1% continue to exceed the Federal Reserve’s 2% target, typically suggesting that the central bank should refrain from cutting interest rates.
However, investors hardly reacted to the data and instead concentrated on the often-overlooked weekly initial jobless claims from the Department of Labor. This data revealed claims surged to 263,000 last week — the highest level in nearly four years, up from 236,000 the prior week and exceeding the forecast of 235,000. This focus was mirrored in bond yields, with the 10-year Treasury yield dropping five basis points below 4% for the first time since turmoil in global equity markets in April.
Crypto markets initially fell in response to the unexpectedly high inflation data but quickly bounced back as the employment figures took precedence. Bitcoin and ether are only modestly higher, but notable activity is seen in altcoins, indicating the investor enthusiasm that typically accompanies easing monetary policy. Solana has risen 11% week-over-week to reach its highest level since January, while dogecoin increased by 17% during the week. XRP gained 6.6% over the past week, climbing back above $3.
“Evidence of a slowdown in the U.S. is now appearing in the hard data; it’s no longer just in the sentiment surveys,” said Brian Coulton, chief economist at Fitch.
Today’s numbers offer a concerning insight into what the U.S. central bank is trying to avoid: stagflation. This rare condition, characterized by high inflation and stagnant growth, is challenging to remedy. For policymakers, it presents a dilemma.
Cutting interest rates to spur growth could further fuel inflation. Conversely, not adjusting monetary policy while employment worsens is hardly a preferable alternative.
For now, traders are betting that the Fed will prioritize growth protection over tackling inflation, with expectations for a rate cut next week appearing almost certain. Nevertheless, today’s data suggests that finding a balance is becoming increasingly complicated, and the road ahead may be trickier than the market anticipates.
“It’s going to be a rough few months ahead as the impacts of tariffs permeate through the economy,” said Heather Long, chief economist at Navy Federal Credit Union. “Americans will face higher prices and likely more layoffs.”
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