Stocks Halt Rally as Inflation Report Looms

U.S. stocks lost momentum Monday after edging close to record highs, as traders kept positions tight ahead of a pivotal inflation report. Treasuries seesawed through the day, while the dollar strengthened.

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With earnings season nearing completion, attention is shifting toward economic indicators that could influence the Federal Reserve’s September policy decision. Investors largely shrugged off news that President Donald Trump extended the pause on tariffs for Chinese imports by another 90 days. The S&P 500 stayed just under the 6,400 mark. Apple Inc. slipped following its strongest weekly performance since 2020, while Intel Corp. rose on reports its CEO was expected to meet with Trump.

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The 10-year Treasury yield finished little changed at 4.28%. The dollar index advanced 0.3%. Bitcoin briefly broke above $122,000. Gold futures remained under pressure after Trump confirmed that U.S. tariffs will not apply to bullion imports.

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On Tuesday, the U.S. is set to release the latest consumer price index (CPI) figures, expected to show a modest uptick in inflation as retailers pass on higher import costs from recent duties.

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Chris Larkin of E*Trade from Morgan Stanley cautioned that any surprises in the report could spark an outsized market reaction. “If CPI comes in significantly hotter than forecast, traders may reassess and conclude the Fed won’t be cutting rates at the next meeting,” he said.

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According to administration officials, Fed Vice Chairs Michelle Bowman and Philip Jefferson, along with Dallas Fed President Lorie Logan, are being considered to lead the central bank once the chair position becomes vacant next year. Treasury Secretary Scott Bessent is expected to interview additional candidates soon.

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A poll by 22V Research found that 18% of investors expect a “risk-on” market reaction to the CPI print, 43% anticipate a “mixed” outcome, and 39% foresee “risk-off” trading.

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Bloomberg’s median economist forecast calls for core CPI excluding food and energy to rise 0.3% in July. Andrew Brenner of NatAlliance Securities was blunt in his assessment: “CPI will not be good tomorrow,” he said, adding that sticky inflation combined with a softening job market will shape the Fed’s policy path more than a single data point.

Money market pricing indicates traders expect more than two rate cuts by year-end, with roughly an 80% chance of a quarter-point cut as early as September.

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JPMorgan Chase & Co.’s market intelligence team, led by Andrew Tyler, sees a 70% probability of further S&P 500 gains post-report. They estimate the index could climb as much as 2% if CPI meets or falls short of forecasts, while a hotter print might trigger declines approaching 3%.

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Mark Hackett at Nationwide noted there’s little evidence tariffs are denting economic momentum. “Retail flows are strong, institutions remain hesitant but are still buying, and share buybacks are on pace for a record,” he said. Hackett still expects a “sideways trend” until a broader market reset later this year.

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Morgan Stanley strategists, led by Michael Wilson, suggested that a soft CPI reading could give small-cap and lower-quality stocks a more stable footing. “Equity investors should stay nimble heading into the report,” Wilson advised.

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Citigroup Inc. strategists lifted their year-end S&P 500 forecast to 6,600 from 6,300, citing stronger-than-expected earnings and management teams largely maintaining their second-half outlooks.

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RBC Capital Markets strategists, led by Lori Calvasina, observed a more optimistic tone from corporate executives during post-earnings calls last week, though concerns over consumer spending and capital expenditures persist.

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Anthony Saglimbene at Ameriprise Financial pointed out that investors currently prefer to focus on tangible positives: robust earnings growth, the long-term potential of AI, and a relatively firm economic backdrop. Still, he warned that this week’s inflation numbers and consumer data could challenge the market’s calm stance on growth risks.

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“Until we see clear evidence of tariffs biting into the economy, markets seem content to keep those risks on the back burner,” Saglimbene said.

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The cautious tone across Wall Street underscores the significance of Tuesday’s inflation report. A softer-than-expected CPI could reinforce expectations for a September rate cut and extend the recent equity rally, while a surprise upside in prices may disrupt those bets and inject volatility.

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With market positioning tight, asset correlations shifting, and policy decisions hanging in the balance, traders and long-term investors alike will be watching the CPI print closely not just for what it says about inflation, but for what it signals about the Fed’s next move.

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