Futures flat as July CPI at 3.4% shapes Fed's September decision

US stock futures held near flat Tuesday, with the S&P 500 up 0.2 percent and the Nasdaq 100 up 0.6 percent, ahead of July CPI data that will shape the Federal Reserve's September rate decision.

"The jobs report may have eased some anxieties about a Fed rate hike next month, but those concerns could hit new highs without cooler-than-expected inflation numbers this week," Chris Larkin, strategist at E*TRADE, said.

Economists surveyed by FactSet expect headline inflation to rise at a 3.4 percent annual pace in July, down from 3.5 percent in June, with core CPI easing to 2.5 percent. Prediction markets lean cooler: Kalshi contracts assign less than a 55 percent probability that the year-over-year rate tops 3.3 percent. The July jobs report, which showed employers cut 23,000 positions against a forecast of 95,000 new hires, has left the Fed's dual mandate in conflict — a hike would address prices running at nearly twice the 2 percent target but add costs to a labor market already shedding jobs.

The print lands ahead of the Fed's September 15-16 meeting, where the committee holds the federal funds rate at 3.50 percent to 3.75 percent. Bank of America forecasts three consecutive 25-basis-point hikes through December, which would lift the rate to 4.25 percent to 4.50 percent by year-end and add roughly $60 a month to a $150,000 variable-rate balance.

Oil prices surged in July as tensions escalated in the Strait of Hormuz, pushing Brent crude from about $71 a barrel at the start of the month to above $100 by July 23. American drivers paid an average of $4.06 a gallon last month, up from about $3 in February, before the Iran war began. Brent traded near $87.72 Tuesday, with WTI at $82.13, as prospects for a US-Iran agreement faded. Gold slipped below $4,400 an ounce as investors booked profits.

A Dual Mandate in Conflict

The July payroll count fell for the first time since late 2025, a miss against the 83,000-job gain economists had forecast. Revisions cut May and June payrolls by a combined 103,000, bringing the 12-month average to just 34,000 jobs per month. The unemployment rate ticked down to 4.1 percent, but for the wrong reason — labor force participation fell to 61.4 percent, a level not seen in more than five years.

Fed Chair Kevin Warsh, sworn in May 22, told Congress on July 15 that inflation has remained above the 2 percent target for 63 consecutive months. The Fed's preferred gauge, the PCE price index, came in at 3.7 percent year over year in June. Three FOMC hawks voted at the July 29 meeting to hike rates immediately, but the majority held them off, 9 to 3.

What a Hot or Cool Print Means

A hot CPI print that pushes September hike odds back above 60 percent would likely push the 10-year Treasury yield — already at 4.70 percent — higher still, and 30-year fixed mortgage rates with it. The most recent Freddie Mac survey put the 30-year fixed at 6.58 percent. A cool print would relieve that pressure and sharpen the signal that the elevated-yield window for high-yield savings accounts, which still pay above 4 percent, is shortening.

The shelter component, which carries roughly 36 percent of headline CPI weight, is still running at 3.3 percent to 3.4 percent year over year. Economists note that all-tenant rents lag new-tenant market rents by three to four quarters, so any moderation in real-time rents may finally be showing up in the July data.

Barring fresh escalations in the Iran war, inflation may have already peaked and could ease throughout the year, dipping close to the Fed's 2 percent goal by this time next year, Mark Zandi, chief economist at Moody's Analytics, said.

This article is for informational purposes only and does not constitute investment advice.