US Stock Market: Wall Street braces for CPI test as Fed rate-hike bets hang in balance

Investors are turning their attention to U.S. inflation data due this week, with the readings expected to play a crucial role in determining whether the Federal Reserve raises interest rates at its September meeting.

The benchmark S&P 500 slipped on Friday but still ended the week with a modest gain, remaining about 1% below its record high reached in mid-August. Stocks have been buffeted by shifting expectations for monetary policy, while rising U.S. Treasury yields have raised concerns about the sustainability of Wall Street's rally.

Markets have increasingly focused on the possibility of a rate hike at the Fed's September 15-16 meeting. Expectations for tighter policy strengthened following a speech late last month from Fed Chairman Kevin Warsh, which indicated that the central bank could be forced to act if inflation remains elevated. The prospect of a hike gained further momentum on Friday after stronger-than-expected labour market data, Reuters reported.


However, the outlook for monetary policy remains uncertain, leaving investors braced for increased volatility ahead of the monthly Consumer Price Index report due on September 11.

The CPI is closely watched by financial markets because of its potential influence on the Fed's interest-rate decisions. Fed officials have continued to stress the importance of returning inflation to the central bank's 2% target, and investors are looking for evidence that recent signs of cooling price pressures are continuing.

According to Reuters, economists expect headline CPI to rise 0.4% in August from the previous month, while core CPI, which excludes volatile food and energy prices, is forecast to increase 0.2%.

PPI, CPI to provide clearer inflation picture

The inflation data will begin with the Producer Price Index on Thursday, a day before the CPI report. The PPI is expected to provide an early indication of price pressures heading into the August consumer inflation reading.

Inflation has remained above the Fed's 2% annual target for several years, although the previous CPI report showed only a limited increase in consumer prices. Investors will therefore be watching closely for confirmation that the cooling trend seen in recent months is continuing.

A stronger-than-expected inflation reading could reinforce expectations for a September rate hike, while softer data could weaken the case for tighter monetary policy and provide some relief for equities.

Rate-hike odds remain finely balanced

Expectations for a September rate increase have shifted sharply in recent sessions. On Thursday, rate-hike bets declined after Fed Governor Christopher Waller indicated that he would favour keeping interest rates unchanged if upcoming data confirmed that inflationary pressures were easing.

Those expectations reversed on Friday after labour market data showed that U.S. employment increased by 162,000 jobs in August, almost three times the market forecast.

Fed funds futures late on Friday implied a 57% probability of a rate hike at the Fed's next meeting. Barclays economists said the employment report had marginally strengthened the case for a quarter-percentage-point increase, while pointing to the upcoming inflation data as the next major test for the policy outlook.

A rate hike could weigh on stocks through several channels. Higher borrowing costs could slow economic activity, while rising Treasury yields could make bonds more attractive relative to equities and put pressure on stock valuations.

The benchmark 10-year Treasury yield rose to around 4.78% late on Friday, moving closer to the 5% level that some investors consider potentially troublesome for equities.

Treasury moves and AI trade in focus

The U.S. Treasury Department is also scheduled to begin a larger programme of buybacks of longer-dated government debt next week. The initiative, announced last month, is viewed by investors as an effort to help contain pressure in the Treasury market and limit further increases in longer-term yields.

Beyond monetary policy, investors will also be watching corporate developments. Oracle's quarterly results, due on Thursday, could have implications for the market's artificial intelligence trade. The company is among the major technology firms investing heavily in AI infrastructure and data centres.

Some of the strongest-performing AI-related stocks, particularly semiconductor companies, have cooled in recent weeks. Other parts of the market, however, have helped support the broader S&P 500.

The index has gained nearly 13% in 2026, supported by a strong corporate earnings backdrop. With the second-quarter earnings season largely over, investors are increasingly focused on risks including bond-market volatility and renewed tensions in the Middle East, Reuters reported.

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