Wall Street Just Got the Inflation Report It Wanted

KEY POINTS

• Inflation came in cooler than expected — the Fed’s preferred PCE measure rose 3.4% year over year, below the 3.7% forecast.

• October rate-hike odds plunged — markets now put the chance near 39%, down from roughly 71% a week ago.

• Tech finished the quarter strong — the Nasdaq and S&P 500 both logged their second straight quarterly gains.

• Special Report: The company SpaceX cannot operate without 

MARKETS

The quick read: Wall Street finally got some relief on inflation Wednesday—but it wasn't enough to make everything green.

The Nasdaq climbed while the S&P 500 and Dow slipped slightly. Underneath those relatively quiet index moves, however, something much more important happened:

Investors dramatically changed their expectations for the Federal Reserve.

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Inflation Finally Gave Wall Street a Break

For the past few weeks, nearly everything has been moving in the wrong direction for investors.

Oil surged.

Treasury yields climbed above 5%.

The Federal Reserve raised interest rates.

And Wall Street increasingly began betting that another hike could arrive as soon as October.

Then Wednesday morning brought the number investors had been waiting for.

The Personal Consumption Expenditures Price Index—the Fed's preferred inflation gauge—rose 3.4% from a year earlier in August.

Economists surveyed by Reuters had expected 3.7%.

Inflation is still too high for the Fed's comfort.

But it wasn't nearly as bad as feared.

And on Wall Street, sometimes “not as bad as feared” is all it takes.

The Fed Trade Just Flipped

Here's where today's report gets really interesting.

Only a week ago, markets were pricing roughly a 71% probability that the Federal Reserve would raise interest rates again in October.

After today's inflation report?

About 39%.

That's a massive shift in just seven days.

And it's particularly striking considering where we were at the beginning of the week.

Investors had been worrying about a familiar chain reaction:

Higher oil → higher inflation → more Fed hikes → higher Treasury yields → pressure on stocks.

Today's inflation report interrupted that chain.

It doesn't guarantee the Fed is finished.

But it gives policymakers something they haven't had much of lately:

Breathing room.

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Inflation Isn't Dead Yet

There is an important catch.

Today's report doesn't mean America's inflation problem has disappeared.

Core PCE—which strips out volatile food and energy prices—was still running around 3% year over year.

That's well above the Fed's 2% target.

And there's another problem today's August inflation report doesn't fully capture:

September's energy shock.

Oil prices climbed sharply during September as geopolitical tensions disrupted energy markets and raised concerns about what higher fuel costs could eventually mean for consumer prices.

So investors essentially received a backward-looking piece of good news today while staring at a potentially more complicated inflation picture ahead.

That's why today's reaction wasn't an all-out stock-market celebration.

The Economy Isn't Exactly Slowing Down Either

Inflation wasn't the only important economic number investors received.

Second-quarter U.S. GDP was revised higher to a 2.2% annualized growth rate.

Consumer spending remained strong, while investment tied to the enormous AI infrastructure buildout continued supporting economic activity.

That creates an interesting situation for the Fed.

Inflation came in softer.

But the economy is still growing.

In theory, that's close to the outcome policymakers have been trying to engineer:

Cool inflation without crushing the economy.

Whether they can actually pull it off is another question.

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WHAT'S MOVING

🟢 Hewlett Packard Enterprise

HPE was one of Wednesday's more interesting AI stories after raising its long-term growth forecast for its networking business.

The company also announced a $1.2 billion order to provide AMD-powered server racks to cloud provider Vultr for AI workloads.

That's another reminder that the AI boom isn't limited to Nvidia.

The enormous amounts of money flowing into data centers are spreading across servers, networking equipment, power infrastructure and other parts of the technology supply chain.

🟢 Amazon, Apple & Nvidia

Megacap technology helped support the Nasdaq Wednesday, with Amazon, Apple and Nvidia among the notable contributors.

🔴 Moderna

Moderna moved lower following a brokerage downgrade.

Then There's the Bond Market

If inflation came in cooler, why aren't investors celebrating even more?

Look at bonds.

Short-term Treasury yields initially fell after the inflation report as traders reduced expectations for an October Fed hike.

But longer-term yields remain elevated.

The 10-year Treasury was on track for its largest monthly yield increase since 2022.

That's important.

The Fed directly controls short-term interest rates.

It doesn't directly control what investors demand to lend the U.S. government money for 10 or 30 years.

Those yields reflect a much bigger mix of concerns:

Inflation.

Economic growth.

Government borrowing.

Debt issuance.

And expectations about where rates ultimately settle.

So even if the Fed skips October, Wall Street's bond problem may not disappear overnight.

September Was Brutal for Bonds

Stocks and bonds told very different stories this quarter.

Bond investors just endured a particularly difficult September as yields surged.

Stock investors?

They held up surprisingly well.

Despite 5%+ Treasury yields, expensive oil, geopolitical uncertainty and another Fed tightening cycle, both the S&P 500 and Nasdaq managed to record their second consecutive quarterly gains.

That says something about the resilience of this market.

Investors continue betting that corporate profits—and particularly the AI investment boom—can outweigh some of the pressure coming from higher interest rates.

So far, that bet hasn't broken.

But October is about to put it to another test.

WHAT INVESTORS SHOULD WATCH

The Fed: October suddenly looks much less certain. Markets have gone from treating another hike as the likely outcome to seeing a pause as more plausible.

Oil: Today's inflation report covers August. Higher September energy prices could show up more clearly in future inflation readings.

Treasury yields: Even with softer inflation, long-term yields remain elevated. That's still one of the biggest pressures on expensive stock valuations.

The labor market: Upcoming employment data will give the Fed another major piece of the puzzle.

AI spending: Massive investment in AI infrastructure continues supporting economic growth and corporate earnings—but eventually investors will want to see equally massive returns.

AROUND THE MARKET

Gold couldn't hold its inflation bounce. Gold initially rose following the softer PCE report before giving back ground as yields and energy prices remained a concern.

The dollar cooled after the report. Softer inflation reduced expectations for an immediate Fed hike, taking some pressure off the dollar.

AI infrastructure spending keeps getting bigger. HPE's $1.2 billion Vultr order is another sign that the AI buildout continues spreading beyond the biggest chipmakers.

Q3 is officially in the books. Despite a punishing quarter for bonds, the Nasdaq and S&P 500 both managed another positive quarter.

THE BOTTOM LINE

Wall Street didn't get an “inflation is over” report Wednesday.

It got something more realistic:

Inflation wasn't as bad as everyone feared.

And that was enough to dramatically change expectations for what the Federal Reserve does next.

A week ago, another October hike looked increasingly likely.

Today, markets put the odds at only around 39%.

That's a meaningful shift.

But October still comes with plenty of potential scares.

Oil remains elevated.

Treasury yields remain high.

Inflation remains above target.

And the Fed hasn't declared victory.

So Wall Street can enjoy today's inflation report.

Just don't put the Halloween decorations away yet.

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