Fed Cuts Loom | Stocks Rally | Bonds Flash Caution

U.S. stocks pushed deeper into record territory Thursday as inflation data came in largely on target and labor market signals weakened, reinforcing expectations for Fed easing. The S&P 500, Nasdaq, and Dow all closed at all-time highs, with the Nasdaq topping 22,000 for the first time and the Dow crossing 46,000. Materials and healthcare led sector gains, while energy was the lone laggard on the day. Treasury yields slid, with the 10-year ending at 4.02%, reflecting bets on a rate cut next week and possibly more to follow. The 10-year has been stubbornly holding above 4.0%, we’ll be watching to see if it can continue to hold that level today.

The CPI report met consensus, with headline inflation rising to 2.9% y/y and core holding steady at 3.1%. Energy prices provided most of the lift, led by a jump in gasoline. Initial jobless claims, however, spiked to 263,000, the highest level since 2021, suggesting labor conditions are cooling more quickly than anticipated. Markets responded by pricing deeper Fed easing, sending yields below 4% intraday before a modest bounce. Futures indicate a 25bp cut is locked in for next week, with odds of a more aggressive cycle now building.

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Markets head into Friday digesting a week of record equity highs and rising conviction that the Fed will lean hard into easing as growth slows. The CPI data confirmed inflation is holding above target but not accelerating, while jobless claims offered the clearest evidence yet that labor softness is spreading. That combination has bond desks talking up a more forceful rate-cutting path. Strategists warn that the divergence between stocks and bonds is sharpening: equities are trading as if a soft landing is intact, while bond markets are flashing deeper recession risk.

Elsewhere, fund flows are highlighting where investors are leaning. Demand for emerging-market debt is improving on the back of stabilizing currencies and relative yield appeal. Meanwhile, crypto markets remain volatile, Bitcoin struggled to hold momentum even as gold flirted with record highs again. With the dollar slipping on the week despite Thursday’s rebound, asset allocators are weighing whether the Fed’s pivot will undermine U.S. currency support. Heading into today’s Michigan sentiment data, the debate is less about whether cuts are coming and more about how aggressive the cycle will be.

Geopolitics sharpened Thursday after Brazil’s former president Jair Bolsonaro was sentenced to 27 years in prison, triggering condemnation from Washington and warnings of a “witch hunt” from U.S. officials. The case raises questions about democratic stability in Latin America’s largest economy. Mexico, meanwhile, unveiled sweeping tariff hikes on Chinese autos, steel, textiles, and other goods, raising levies to as much as 50% in a bid to shield domestic industry and jobs. Beijing responded sharply, warning of countermeasures and accusing Mexico of bowing to U.S. pressure.

In Europe, NATO tensions remain in focus as Russian war games and recent drone incursions into Polish territory underscore the salami-slice tactics testing the alliance. The Economist reports that Russia’s strategy is explicitly aimed at eroding NATO credibility, even as Western allies reaffirm commitments. In Asia, Trump’s push for a $550 billion trade and investment package with Japan underscores how tariffs and incentives are being wielded simultaneously to realign supply chains. Taken together, global trade fault lines are widening, with the U.S. leaning on allies to isolate China while Russia keeps the West off-balance in Europe.

Political fallout continued in Washington after the killing of conservative activist Charlie Kirk, which has sparked heightened security fears on Capitol Hill and deepened partisan divides. Lawmakers scrambled to address safety protocols even as conspiracy theories spread quickly online. While markets largely shrugged off the tragedy, the episode adds to an already volatile political backdrop ahead of next year’s election cycle.

Separately, Trump pressed forward in his legal battles with the Fed, as his lawsuit challenging Governor Lisa Cook’s role heads toward hearings next week. The timing could intersect awkwardly with the Fed’s September meeting, highlighting the unusual degree of political interference in monetary affairs. For investors, the message remains clear: the Fed’s policy path is data-dependent, but the political noise surrounding it is only getting louder.

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Markets are closing the week with a powerful rally underpinned by softer labor data and inflation that remains controlled. Stocks are pricing in resilience and liquidity, while bonds are bracing for sharper economic slowing. With geopolitical risks rising in Brazil, Mexico, and Europe, and U.S. politics intensifying, investors are juggling crosscurrents that extend well beyond Fed policy. For now, momentum favors risk assets, but the widening disconnect between equity exuberance and bond caution suggests volatility ahead as the easing cycle begins.