Shift in Market Focus
U.S. markets brushed off a hotter-than-expected August inflation report, turning their attention instead to signs of a weakening labor market. This pivot reflects growing concern over a deeper economic slowdown. The Consumer Price Index (CPI) showed headline inflation at 2.9% and core inflation at 3.1%, both above the Federal Reserve’s 2% target. Under normal circumstances, such figures would argue against interest rate cuts. However, investors largely ignored the data, focusing instead on weekly initial jobless claims.
Labor Market Weakness
Jobless claims surged to 263,000 last week — the highest in nearly four years — up from 236,000 the prior week and well above the 235,000 forecast. This labor data shifted sentiment, pushing the 10-year Treasury yield down five basis points to below 4% for the first time since April’s tariff-driven market sell-off.
Crypto Market Reaction
Cryptocurrencies initially dipped on the inflation surprise but quickly rebounded as labor market concerns took center stage. Bitcoin (BTC) traded at $115,253.77 and ether (ETH) posted modest gains, while altcoins outperformed. Solana (SOL) rose 11% week-over-week to its highest since January, dogecoin (DOGE) gained 17%, and XRP advanced 6.6% to reclaim the $3 level.
Economic Outlook
“Evidence of a slowdown in the U.S. is now appearing in the hard data; it’s no longer just in the sentiment surveys,” said Brian Coulton, chief economist at Fitch. The data hints at stagflation — a rare and challenging mix of high inflation and stagnant growth. Policymakers face a dilemma: cutting rates to support growth risks fueling inflation, while holding rates steady could worsen employment conditions.
Policy Expectations
For now, traders are betting the Fed will prioritize growth, with a rate cut next week seen as nearly certain. Still, today’s figures suggest the balancing act is becoming more difficult, and the path forward may be more complex than markets anticipate. “It’s going to be a rough few months ahead as the tariff impacts work through the economy,” said Heather Long, chief economist at Navy Federal Credit Union, warning of higher prices and potential layoffs.
Fundfa View
The market’s reaction underscores a shift in focus from inflation control to growth preservation. While this may support risk assets in the short term, the underlying stagflation risk could complicate the Fed’s policy path and market stability in the months ahead.