Investors to pore over inflation data for signals on rate trajectory

Investors will closely examine inflation data next week to gauge whether the U.S. Federal Reserve will raise interest rates later in the month, according to Reuters. The benchmark S&P 500 ended the week with a slight gain and was nearly 1% below its mid-August record high, influenced by shifts in rate-path expectations and worries that higher U.S. Treasury yields might hinder Wall Street's rally.

Markets have been focused on the likelihood of a rate increase at the Fed's upcoming meeting on September 15 to 16, following remarks from Fed Chairman Kevin Warsh and a strong labor market report on Friday. However, the possibility of a rate move remains uncertain, leaving investors on edge for volatility tied to the monthly Consumer Price Index report on September 11, Wall Street's most closely followed inflation indicator.

Fed officials have emphasized their dedication to price stability, and they may need to back up their words with action if inflation doesn't show enough improvement, according to Sid Vaidya, chief investment strategist at TD Wealth. The S&P 500 has risen nearly 13% in 2026 due to strong corporate profits, but investors anticipate a potential decline in September, traditionally the weakest month for U.S. stocks.

Upcoming data on producer prices will provide a preliminary look at August's inflation trends, with the S&P 500 closed on Monday for Labor Day. Thursday's Producer Price Index report arrives a day before the CPI data. Economists surveyed by Reuters anticipate a 0.4% monthly increase in August CPI and a 0.2% rise in the core measure, excluding food and energy components.

Inflation has been consistently above the Fed's 2% annual target for several years, but the previous month's CPI reading showed minimal price growth. The upcoming CPI will reveal whether the cooling seen in June and July has truly materialized. Odds of an interest-rate hike fell on Thursday after comments from Fed Governor Christopher Waller suggesting he supports keeping rates steady if inflation data indicates cooling.

They rose again on Friday after August employment growth of 162,000 jobs, nearly triple the forecast. Fed funds futures suggested a 57% chance the central bank would hike at its next meeting. Barclays economists stated that the employment report marginally strengthens the case for a quarter-percentage-point hike at the September meeting, noting that attention shifts to next week's inflation data.

Higher borrowing costs from rate hikes could slow the economy, while higher Treasury yields might increase investment competition from bonds and pressure equity valuations. The 10-year Treasury yield rose to 4.78% on Friday, edging closer to the 5% level that investors view as concerning for equities. Next week, the Treasury Department will begin a larger program of buybacks of longer-dated debt, aimed at curbing rising Treasury yields.

On Thursday, Oracle's quarterly results could impact the market's AI trade, as some of the highest-flying AI stocks have cooled, but other sectors have supported the S&P 500. The equity market is still recovering from a momentum unwind in July, seeking new leadership and a narrative to drive the next move, according to Natixis' Melson.