Inflation jumped to 2.9%. Jobless claims hit 263,000, the highest since 2021. That’s the setup. And Wall Street cheered.
Why? Because in this warped cycle, bad news is the only good news left.
August CPI came in hot. Prices rose 0.4% in a single month. Shelter—still sticky. Food—up. Gasoline—up almost 2%. Cars? Both new and used moved higher. Tariffs feeding straight into consumer costs.
None of this looks like inflation under control.
Doesn’t matter. Markets only cared about jobs cracking. Claims jumped 27,000 in a week. Payrolls added just 22,000 in August. And the government admitted earlier gains had been overstated by nearly a million. The labor tape broke.
Rate cut odds for September: 100%. Not debate, not maybe—done. Some even betting on 50 bps. More cuts penciled in for October and December. The Fed put is alive.
Inflation hasn’t died. Services are still running north of 3%. Shelter alone makes up a third of CPI, and it’s not falling fast enough.
And yet the Fed will cut. Powell all but said it—layoffs materialize quickly, and they’re scarier than 3% inflation. After 2008, after 2020, the institution is hardwired to save jobs first.
Earnings face margin pressure from costs. Breadth is thin—mega-cap tech carries the tape. Bonds priced in a dovish Fed, with the 10-year sliding under 4%. But long-term inflation expectations haven’t anchored.
What happens next depends on which road gets taken.
Maybe the soft-ish landing. Cuts stabilize claims around 230k, unemployment stays under 5%, inflation drifts lower over the next year. Equities grind, duration rallies. That’s the fantasy Wall Street is clinging to.
Or stagflation: claims stay elevated, inflation doesn’t cool, the Fed is trapped. Cut and risk un-anchored expectations, hold and watch unemployment climb. Both stocks and bonds bleed.
Or policy disappointment. Powell trims just 25 bps, talks tough, says data dependent. Futures had priced max dovishness. Cue sell-the-news. If the next payrolls report is weak, the pain doubles.
Add global dynamics. The UK stuck in stagflation, Eurozone holding up better. If the Fed eases while others stand pat, the dollar drops—importing higher commodity costs. Another inflation loop no one’s pricing.
The cut is coming. That’s not the story. The story is how markets now celebrate layoffs because they guarantee liquidity.
263,000 people filing for unemployment last week aren’t celebrating.