Week of August 18, 2025

Key Points for the Week

• The S&P 500 made more new highs.
• Historically, rate cuts near all-time highs have been quite bullish for the stock market.
• Under the surface, potential near-term divergences may be forming creating short-term concerns for the stock market.
• Inflation data last week (consumer prices, producer prices) raised the hopes for a rate cut in September.

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Current Trends & News is a weekly financial recap curated by SPC Financial®'s team of wealth management and tax-integrated advisors. We monitor and explore the intricacies of the financial world and share insights into market developments.

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Economic Update

Last week, major news sources had varied perspectives on inflation. Here are a few of the headlines we saw:

"Core Inflation Rises to 3.1 [percent]” (Barron's) "Inflation holds steady..." (CNN) “Inflation cools slightly in July from prior month” (Fox Business)

Remarkably, all were correct. The news sources simply highlighted different aspects of the Consumer Price Index (CPI). Here's what the CPI showed for June and July of this year.

	June 2025 (month to month)	July 2025 (month to month)	June 2025 (year over year)	July 2025 (year over year)
Headline inflation (all items measured)	0.3%	0.2%	2.7%	2.7%
Core inflation (excludes volatile food and energy prices)	0.2%	0.3%	2.9%	3.1%

Headline inflation moved slightly lower, on a month-to-month basis (from June to July). It remained steady year over year, which is the 12-month period through July 2025. In contrast, core inflation, which excludes volatile food and energy prices, moved slightly higher on a month-to-month basis (from June to July). It increased year over year. Overly simplified, food was up and gasoline was down.

The Federal Reserve (Fed)'s target for inflation is 2 percent.

The Producer Price Index (PPI) came out last week, too. It tracks how prices have changed for groups that produce and sell goods and services. It was up 3.3 percent in July, year over year, which was higher than June's 2.4 percent increase.

“U.S. wholesale inflation accelerated in July by the most in three years, suggesting companies are passing along higher import costs related to tariffs. The producer price index increased 0.9 [percent] from a month earlier, the largest advance since consumer inflation peaked in June 2022.”

Augusta Saraiva, Bloomberg

Last week, major U.S. stock indexes continued to rally. U.S. Treasury yields were mixed. Yields for some shorter maturities of Treasuries moved lower, while yields on longer maturities rose.

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This Week in the Markets

Stocks gained again last week, as the S&P 500 hit more new highs, while the Dow is close to its first high this year, and small caps soared on hopes over rate cuts. As noted, during the past few weeks, August and September historically can be troublesome months and though new highs are great, there may be stock market volatility in the months ahead.

Current market-based pricing suggests there is currently a little less than an 85% chance of a rate cut at the next Federal Reserve Bank (Fed) meeting in four weeks. The Fed cut rates twice last year with the index near all-time highs (in September and November). The good news is rate cuts near all-time highs have seen stocks higher a year later 20 out of 20 times and when last year's September and November 2024 cuts reach one year, we could have 22 out of 22. In other words, if the Fed cut rates in September and the S&P 500 is still near new highs, it could be another positive driver for stocks.

The number of stocks in the S&P 500 that are above their 20- and 50-day moving averages is lower than it was a month ago, even though the S&P 500 has moved higher. This is called a negative divergence, and it could be a clue there is weakness under the surface. Additionally, we are seeing other negative divergences from other indicators we follow.

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The Federal Reserve

The market cheered the July Consumer Price Index (“CPI") inflation report released on August 13, 2025, but mostly because it was perceived to be good enough to keep the Federal Reserve (“Fed”) on track for a September rate cut. The market-implied odds for a September cut rose from about 85% to 100%, according to the CME Groups FedWatch tool—implying investors thought a rate cut in September was a lock. However, the July Producer Price Index (“PPI”) report released the next day took those odds back down to 85%—a cut is still the base case, but not quite a certainty. The volatility around September rate cut expectations is something we've seen for a few months now, especially after payroll data. Rate cut expectations fell after a strong June payroll report and plunged below 50% on Powell's hawkish comments following the Fed's July meeting. Then expectations completely reversed after the weak July payroll report release.

All this to say, there're been considerable uncertainty around the Fed's next move, and that's partly because the labor market is seen to be weak even as inflation remains elevated. So, the big question is whether the Fed prioritizes their inflation mandate or moves to protect the labor market. Keep in mind that we will be getting one more payroll report and one more inflation print before the Fed's next meeting on September 16–17. But first all eyes will be on Fed Chair Jerome Powell's speech at the annual central bank get-together in Jackson Hole this upcoming Friday.

The Fed Has an Inflation Problem

The market mood was good after the July CPI report release. As we noted above, markets seemed eager to embrace the more potentially rate-friendly environment. The Russell 2000 Index of small cap stocks jumped 3.0% compared to a still solid gain of 1.1% for the S&P 500. But things weren't so happy in fixed income, likely on concerns by bond market participants that there was still some worrisome inflationary pressure underneath the surface and lower interest rates might increase inflation risk. The Bloomberg US Aggregate Bond Index was flat at 0.0% on CPI Day and the Bloomberg U.S. Government: Long Index fell 0.5%.

Despite the market response, the overall inflation numbers were not so much good as not as bad as feared. Headline inflation climbed 0.2% in July to take the one-year number to 2.7%, while core inflation (ex-food and energy) climbed 0.3% to take the one-year number to 3.0%, a five-month high.

Core inflation at 3.0% is still a long way off from the Fed's target of 2.0%, and as you can see below, it's moving in the wrong direction. Still, on the face of it, it looked like tariff-impacted inflation for goods was offset by disinflationary forces from shelter and that was reason for cheer.

Core goods excluding autos, which has been used as a proxy for tariff-sensitive inflation, slowed to 0.22% in July from 0.55% in June.

The slowdown in core goods ex-autos does suggest that consumers are not yet bearing the full brunt of tariff-induced price increases. The most likely reason for the softer-than-expected reading is that pre-tariff inventory is still making its way through the supply chain, a factor that's on the clock, especially with the return of reciprocal tariffs in August. It's also possible that companies are finding some loopholes to blunt the impact of tariffs. If these factors stay in play, it could be that economists misjudged the impact that tariffs would have on inflation. That could be part of the picture, but we think it's more likely that they misjudged the timing of the impact.

None of these factors guarantee that goods inflation will stay tame—it's likely we'll see continued pressure-but for now the pass-through looks manageable. But two major seasonal sources of demand for goods purchases—back to school and holiday shopping—are around the corner and the risk remains that as seasonal goods demand rises, inventories turn over, and newly implemented reciprocal tariffs start to bite, the impact of tariffs on goods inflation will become more prominent.

One thing to keep in mind is that rising core goods prices are a break from the 2023-2024 trend (and even the 25-year pre-pandemic trend) when core goods prices steadily fell. Now, tariff-related increase should be a one off, or “transitory,” and ideally, something the Fed can look through. The problem is that there was concerning acceleration in “supercore” inflation (services inflation excluding energy and shelter), which climbed to 3.3% year over year, a five-month high. The Atlanta Federal Reserve calculates something called the Sticky Price CPI excluding food, energy, and shelter. It measures inflation for items whose prices typically don't change frequently, and it is now up 2.8% on the year, an eight-month high. The story here is that we may be seeing inflation broadening out rather than remaining isolated to those areas of the economy most immediately impacted by tariffs. Despite the positive market reaction to the report, if inflation in fact is broadening it could make the Fed's task more difficult.

One key piece of services inflation we like to keep an eye on is CPI for “full services meals and snacks,” primarily seated restaurants, to gauge underlying inflationary pressure. That's because it combines several drivers of inflation including:

• Worker wages
• Food inflation, and even energy prices (including transportation)
• Rent of restaurant premises

Inflation for restaurant meals is running at a 5.3% annualized pace over the past three months, a slowdown from the previous month but still quite elevated, and 4.4% over the last year. That's well above pre-pandemic levels and in fact higher than at any point in the 2000s and 2010s, a level inconsistent with "normal" 2% inflation.

Worker wages are easing, and it's unlikely higher rents are a problem, which means the source of inflation is likely to be underlying food prices, and probably energy and transportation costs.

The Producer Price Index (“PPI”) data for July also told us that rising food costs are a problem. July PPI came in well above expectations, rising 0.7% month over month (close to 9% annualized). This was partly because wholesale food prices surged 1.4% in July (that translates to an annualized pace of about 18%). But PPI was hot even outside of food (and energy), and this was because of rising margins.

PPI for "Trade Services” doesn't measure output prices, as wholesalers and retailers don't change the product being sold. They add value through services that help sell more items (like sales promotions, warehousing, etc.). So, PPI for this category measures changes in prices due to margins, i.e. the retailers selling price minus the price of acquiring that good. Margins jumped 2% in July and are up almost 7% over the year. This would be a good thing as far as companies are concerned but one business's margin increase is another person's inflation. One of the big reasons behind the 2021-2022 inflation surge was rising margins—companies were paying higher input costs for their goods, but passed all of that, and then some, to consumers. It looks like the same dynamic could potentially be happening now. It also tells you that companies believe consumers can take the bite of higher prices without reducing the quantity of goods they purchase as significantly.

Should the Fed Cut Interest Rates?

Should the Fed return to even a modestly aggressive cutting cycle, the primary risk is that the overall economy is not as weak as the post-jobs report narrative has made it out to be, and even if it is there may be more resilience built into the economy than meets the eye. We've talked about some of these factors in various contexts including:

• A surge in AI-related capital expenditures
• Strong consumer balance sheets
• No warning signs of a slowdown at this point from the stock market or credit markets

We should also not lose sight of the segment of the economy that is most negatively impacted by lower rates, that is savers, including most retirees. Savers have been thrilled to be getting a more than 4% return on “cash” compared to the near zero interest rates of much of the 2010s. In fact, if rates are pulled down too quickly and inflation remains elevated, savers and retirees get hit twice, once on the lower return of short-term Treasuries and again on inflation eating up more of the return that's left.

The Fed has put itself in a difficult position by not cutting rates earlier this year as it gets pulled in two different directions by its dual mandate. Tariffs cloud the picture considerably. Tariffs clearly raise prices but if they're “one-off,” the argument for the Fed cutting rates is that hiring is weak, pulling economic growth lower. But if tariffs are not inflationary (and therefore the inflation problems are deeper), then the Fed really does have a big inflation problem on their hands, with inflation stuck about 1%-point above their target on the back of hot services inflation.

The jobs report shifted the balance toward emphasizing a slowing economy and cutting, and that appears to be the path we're currently on. Overall, that's good for markets (and the economy).

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Where are Interest Rates Headed?

One of the drivers behind the recent stock market rally has been an expectation that the U.S. Federal Reserve (Fed) will respond to softening economic data by lowering the federal funds rate, reported Saeed Azhar, Johann M Cherian and Sanchayaita Roy of Reuters.

Fed rate cuts are intended to stimulate economic growth by making it less expensive to borrow money. When it's cheaper to borrow, companies' expenses may fall and profits can increase, lifting stock prices, reported Mary Hall of Investopedia.

After last week's Consumer Price Index was released, expectations for a September Fed rate cut soared above 90 percent, according to CME FedWatch.

"Inflation is still higher than the Federal Reserve would like — but not high enough to stop the central bank from cutting interest rates next month. That's investors' takeaway from yesterday's consumer price index report.”

Phil Serafino and Edward Bolingbroke, Bloomberg

The catch is that a Fed rate cut doesn't always have the intended effect. Sometimes, the Fed reduces or increases the federal funds rate and other interest rates don't follow suit.

“Let's cast our minds back briefly to the early 2000s, to [former Fed Chair] Ben Bernanke and to the famous savings glut hypothesis. So, back then, the Fed was hiking [the federal funds rate] but long-term Treasury rates weren't going up. Bernanke said it's because there's a glut of global savings. All of this money is coming from China and Saudi into the U.S. Treasury market...that situation is reversed and we're no longer in a world with a savings glut. We're in a world with a savings shortage. And that means it doesn't matter who President Trump appoints as the next Fed chair...that savings shortage is going to mean that long-term rates, the 10-year Treasury yield stays high and...we think 4 to 5 percent for the 10-year Treasury is the new normal."

Tom Orlick, Bloomberg Economics Chief Economist

The 10-year U.S. Treasury note yielded 4.27 percent at the start of last week. By week's end it was at 4.33 percent.

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A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits.
• Asks you to pay to receive a prize.
• Suggests that paying will increase the chance of winning.
• Requests financial information, such as a bank account or credit card number.
• Pressures you to act immediately.
• Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way.
• Remain calm.
• Think back over the call. Write down any personal information you may have inadvertently shared.
• Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state's attorney general or your local consumer protection agency.
• Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver's license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

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IRS Shifts to Electronic Payments

On March 25, 2025, President Trump signed Executive Order 14247 – Modernizing Payments to and From America's Bank Account. The order requires all payments made from or to the IRS to be conducted via electronic funds transfer (EFT).

The purpose of the Executive Order is to combat unnecessary costs, delays, risk of fraud, lost payments, theft and inefficiencies. For Fiscal year 2024 issuing paper checks was estimated to cost taxpayers more than $657 million.

The phaseout of paper check disbursements and receipts is scheduled for Sept. 30, 2025. Payments such as fees, fines, loans and taxes must be made electronically where permissible under existing law.

A few exceptions will remain at the discretion of the Treasury secretary:

1. Individuals without access to banking services or electronic payment systems;
2. Emergency payments where electronic disbursement would cause undue hardship;
3. National security- or law enforcement activities where non-EFT transactions are necessary or preferred;
4. Other circumstances as deemed necessary by the secretary.

Heads of federal agencies must submit implementation plans within 90 days of the order. Treasury Secretary Scott Bessent has 180 days to submit an implementation report detailing progress under the order.

Taxpayers should prepare for the shift to electronic payments ahead of the Oct. 15 filing deadline.

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Did you Know? This Week in History

June 19, 1976: Viking 1 Launched to Mars

On June 19, 1976, Viking 1, an unmanned U.S. planetary probe, was launched from Cape Canaveral, Florida, on a mission to Mars.

The spacecraft entered into orbit around Mars and devoted the next month to imaging the Martian surface with the purpose of finding an appropriate landing site for its lander. On July 20–the seventh anniversary of the Apollo 11 lunar landing-the Viking 1 lander separated from the orbiter and touched down on the Chryse Planitia region, becoming the first spacecraft to successfully land on the surface of Mars. The same day, the craft sent back the first close-up photographs of the rust-colored Martian surface.

In September 1976, Viking 2—launched only three weeks after Viking 1—entered into orbit around Mars, where it assisted Viking 1 in imaging the surface and also sent down a lander. During the dual Viking missions, the two orbiters imaged the entire surface of Mars at a resolution of 150 to 300 meters, and the two landers sent back more than 1,400 images of the planet's surface.

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Weekly Focus

"Men and nations do not act wisely, when they have exhausted all the other possibilities.”

L,Abba Eban, Israeli Diplomat

"As soon as we abandon our own reason and are content to rely upon authority, there is no end to our troubles."

L,Bertrand Russell, British Philosopher

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