Stocks Hit Record High | Is A Bumper Fed Rate Cut Next?

Global stocks have climbed to a record high after the latest US inflation data eased price concerns and strengthened bets on a Federal Reserve interest-rate cut next month. The MSCI All Country World Index hit an all-time peak, following Wall Street's surge, as money markets came close to pricing in a 25-basis-point reduction at the Fed's next meeting. While core US inflation accelerated to its fastest pace since the start of the year, a modest rise in goods prices has tempered fears that the cost of tariffs could push up prices more broadly. Our Markets Live Managing Editor Kristine Aquino joins Stephen Carroll on Bloomberg Radio to discuss.

A largely benign US inflation report is bolstering the case for traders betting that the Federal Reserve will soon cut interest rates, with some seeing an increased possibility of an outsized reduction.

For weeks, investors have piled into swaps, options and outright Treasury longs to wager that subdued inflation will allow the Fed to lower borrowing costs in coming months. There’s some vindication for that view, with shorter-term Treasury yields dropping for a second day on Wednesday, while swaps traders lifted the odds of a September rate cut to more than 90%.

Bets that the Fed will reduce rates by more than 25 basis points in September also gained traction, with traders adding some $2 million in premium on Tuesday to a position in the Secured Overnight Financing Rate (SOFR) that would benefit from such a move. In an interview, Treasury Secretary Scott Bessent suggested that the Fed ought to be open to a bigger, 50 basis-point cut next month.

The inflation report “was a bit stronger than we have seen over the prior few months, but lower than many have feared,” said Rick Rieder, chief investment officer of global fixed income at BlackRock, in a note. “As a result, we expect the Fed to begin cutting rates in September, and it could be justified cutting the Funds rate by 50 basis points.”

Tuesday’s report was far from an all-clear for the Fed. Though a tepid rise in the costs of goods tempered concerns about tariff-driven price pressures, underlying US inflation accelerated in July by the most since the start of the year.

With more than a month remaining until the central bank’s Sep. 16-17 meeting, Treasury bulls will also need to weather another major inflation report as well as key employment data.

“September is not a done deal,” Claudia Sahm, chief economist at New Century Advisors, said on Bloomberg TV. “We do not have the data that puts this one in the bag yet.”

For now, however, bets on a dovish Fed are taking the spotlight. The options trade linked to SOFR September contracts — where premium now stands at roughly $5 million — could pay off as much as $40 million should they price in a 50 basis point rate cut for that month, Bloomberg calculations showed.

Meanwhile in the cash market, investors unwound long positions in the build-up to the inflation data, shown by a survey of JPMorgan Treasury clients covering the week up to Aug. 11.

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