U.S. July CPI, PPI, and retail sales data all came in soft. Combined with cooling employment, the market’s odds of a September rate hike at the Federal Reserve plunged from 75% to 25%, lifting global stock markets for a third straight week. However, oil prices are still elevated, the U.S. Treasury yield curve has steepened, and the long end of the bond market continues to price in inflation and fiscal deficits. With the Jackson Hole meeting coming into focus in two weeks, it is set to become a key directional signal.

U.S. inflation data unexpectedly cooled, while employment and consumption also softened. This week, market expectations for a September rate hike rapidly unwound. But abnormal signals from the long end of the bond market, the surge in oil prices, and the persistence of hawkish officials are challenging this “pause narrative.”

The probability of a September rate hike fell sharply from 75% in late July to around 25%. That drove global stock markets higher for a third consecutive week, and major U.S. indexes remained near historical highs.

AI infrastructure-related earnings have continued to be strong, providing additional support for technology stocks and allowing equity markets, for the time being, to overlook the warning sounds coming from both oil-price shocks and the long end of the bond market.

Yet the Iran/Strait of Hormuz crisis pushed Brent crude up by nearly 6% this week, approaching $90 per barrel; at the same time, the auction yield on U.S. 30-year Treasuries touched the highest level in 25 years.

While stocks cheer “the Fed turning,” the long end of the bond market is still pricing inflation and fiscal deficits—two sets of logic running in parallel. Who is right versus who is wrong could be the most important trading question of the second half of this year.

Inflation cools, September rate-hike expectations collapse

This week’s biggest macro driver comes from a series of softer U.S. data:

July CPI rose only about 0.1% month over month, and about 3.4% year over year; core inflation pressures continue to ease moderately;

July PPI was flat month over month, coming in below expectations;

July retail sales fell 0.6% month over month, the largest single-month drop in more than a year. It was far worse than the market’s expectation of a slight increase. Weakness in autos, oil prices, and several timing-related factors all weighed on the figures.

Combined with the nonfarm payroll data already released last week (down by 23,000 and revised lower), the soft-data mix caused the market’s expectations for near-term Fed hikes to unravel across the board, erasing all the hawkish premium that had built up since Chair Powell took over.