Prosperiax Brief

The Federal Reserve finally pulled the trigger on a rate cut — the first since 2023. Markets cheered, pushing stocks to record highs. But beneath the excitement, inflation is still sticky, energy markets are shifting under new pressures, and corporate credit is surging to levels that usually come late in a cycle.

This week, the challenge is separating celebration from signal. Rate cuts help markets, but they often arrive when risks are building. The next few weeks will tell us if the Fed is getting ahead of trouble, or if trouble is already here.

Equities marched higher, with the S&P 500 up 1.2 percent and the Nasdaq up 2.2 percent. Large technology names led the way, while smaller companies struggled to keep momentum.

Policy took center stage. The Fed’s quarter-point cut was framed as insurance against rising risks in the labor market. Officials projected two more cuts before year-end, but Powell stressed that decisions will remain data-dependent.

Inflation remained firm. August consumer prices climbed 0.4 percent from the prior month, the strongest pace since January. Shelter and food costs continue to be the sticking points.

Credit markets roared to life. Companies rushed to issue roughly $15 billion of investment-grade debt, locking in lower costs while spreads tightened to levels last seen almost thirty years ago.

Commodities told a different story. Oil prices fell despite easier policy, with Brent settling near $66 and WTI around $62. Energy equities lagged while renewable and utility demand indicators strengthened.

S&P 500: New highs are impressive, but the advance is concentrated in AI-linked technology stocks. Broader participation will be key to sustaining momentum.

Treasuries: Ten-year yields remain above four percent, reflecting investor caution on long-term growth even as the Fed eases.

Dollar: The greenback slipped after the Fed’s decision but remains firm compared to peers. A weaker dollar would provide relief for exporters and support commodities, but relative U.S. growth strength may keep it supported.

The trend shows progress toward disinflation, but the slowdown is uneven. Goods categories continue to cool, while services — particularly shelter and healthcare — remain sticky.

For the Fed, this creates a dilemma. Lower inflation prints give cover to ease policy further, but stubborn service costs could keep pressure on the central bank to move cautiously. Powell has emphasized that cuts will depend on “a broader set of data,” which means this week’s CPI release will be decisive.

What this means for markets: Softer inflation data would validate the Fed’s recent cut and likely support credit markets, where issuance is surging. Defensive equities, such as utilities and consumer staples, also tend to benefit in an easing environment. A hotter number, however, could quickly reverse optimism, lifting Treasury yields and challenging the Fed’s forward path.

The Fed’s September cut signals a shift in priorities. Inflation is not yet at target, but policymakers are increasingly focused on employment stability. Powell pointed to rising risks in the labor market as a justification for easing now.

Markets welcomed the move. Equities surged, credit spreads tightened, and AI-linked stocks drove benchmarks higher. But investors should remember that rate-cutting cycles often begin when economic momentum is already slowing.

What comes next depends on data. If jobless claims climb and payroll growth softens, the Fed will be pushed toward faster cuts. If inflation surprises higher, the easing path could stall, leaving markets exposed. Corporate debt issuance at record pace is another late-cycle signal that should not be ignored.

The message is clear: the Fed is threading a needle. Supporting jobs without losing control of prices is a difficult balance, and the weeks ahead will reveal whether the market’s optimism is justified.

This week’s consumer price index report is the main event. A cooler reading would validate the Fed’s move and likely extend the rally. A hotter number could spark volatility across equities, bonds, and currencies.

Market breadth is another test. If leadership expands beyond AI-driven technology, the rally strengthens. If not, concentration risk will grow.

Credit remains a double-edged sword. Borrowers are benefiting from historically tight spreads, but investors should be wary of limited compensation for risk.

Energy remains a story of divergence. Oil prices are under pressure, but power demand tied to AI and renewables continues to accelerate. The beneficiaries are shifting away from traditional producers toward utilities and clean energy.

Above all, remember that the first Fed cut in a cycle is not a green light. It is a warning sign that the cycle is turning. Success this week will depend on staying alert to the signals — inflation, jobs, credit, and breadth — that reveal which way the balance tips.