Good morning — lots of ground to cover today! We’re unpacking the much-anticipated inflation report, the outlook for interest rate cuts, and a rule-breaking central banker.

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Inflation tempers jumbo rate cut odds

The annual inflation rate has now cooled for five months in a row. 

The Bureau of Labor Statistics reported Wednesday that August Consumer Price Index increased 2.5% compared to a year ago, hitting that level for the first time since March 2021. 

Stock market investors, for one, seemed to cheer on the data. 

While each of the three major benchmarks have sold off to start September, they rallied into the green on Wednesday, with the tech-heavy Nasdaq adding 2.17%.

In any case, the headline inflation number came in as expected, yet the closely-watched Core CPI — which strips out food and energy costs — increased 3.2% compared to a year ago. 

Compared to July, it climbed 0.3% to mark the biggest jump in four months. 

After the data published, CME data showed market expectations plummeted for the Fed to make an outsized 50-basis-point rate cut next week. 

“I don’t think today’s data did much of anything,” Eric Wallerstein, the chief markets strategist at Yardeni Research, told me. 

As of Wednesday evening, the odds for a 25-basis-point move hovered at 87%.

One day prior that was at 66%, and a week ago stood at 56%.

Even before the CPI report, Wallerstein — who used to work at the New York Fed — said the case for a half-point rate cut looked minimal. 

“Some unknown crisis would have had to come out of the woodwork for a jumbo cut,” he explained. 

The report showed shelter prices climbed 0.5 percent in the biggest monthly gain all year. 

That ran counter to expectations for a smaller gain, though it continued the pattern of housing costs being the main driver of consumer prices. 

“A 50-basis-point cut would create more issues than solutions for the Fed,” Wallerstein said.

“Maintenance cuts are never in bigger increments than 25 basis points, unless there is a crisis the Fed is trying to stem.” 

UBS economist Brian Rose took a similar view. 

“The inflation data has been good enough to allow the Fed to start cutting rates in September, but does not give them a reason to cut aggressively,” Rose wrote in a note Wednesday.

This morning, investors will be looking toward the August producer price index, which economists expect to show moderating growth.

Comments or feedback? Hit reply to this email or let me know on X @philrosenn.

Elsewhere:

🎙️Nvidia’s Jensen Huang made waves at Goldman Sachs’ technology conference, with attendees lining up over an hour to see him speak. In a wide-ranging conversation, the CEO commented on the AI industry, the cloud, and careers: “I think the day of every line of code being written by software engineers, those are completely over.” (Yahoo Finance)

📉 Annual inflation, broken down by product. Egg prices have climbed 28.1% since last August, pork chops are up 5%, and tomatoes are up 3.9%. Meanwhile, cigarettes are 9.3% more expensive, motor vehicle insurance is up 16.5%, and flowers are up 5.6%. (CNBC)

🏦 Goldman Sachs’ CEO sees two or three Fed cuts coming. David Solomon reaffirmed his bank’s expectations for a quarter-point cut this month, and said he expects “two, maybe three” rate cuts as fall approaches. (FT)

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