Daily Newsletter 9/12/25

The U.S. Consumer Price Index (CPI) for August 2025 was released yesterday, showing a 0.4% increase on a seasonally adjusted basis from the previous month, which was higher than July's 0.2% rise. Over the past 12 months, the CPI increased by 2.9%, marking the highest annual inflation rate since January and slightly up from 2.7% in July. The largest monthly contributors to the increase were shelter, which rose 0.4%, food prices that increased by 0.5%, and energy prices, which went up 0.7%, with gasoline prices rising 1.9% in August. Core inflation, which excludes food and energy, rose 0.3% month-over-month and 3.1% year-over-year, maintaining the same level as in July.

This situation underscores the growing complexity of the Federal Reserve’s task in balancing its dual mandate. The challenge now lies in determining which aspect of the mandate—price stability or maximum employment—may need to be temporarily compromised to effectively navigate current economic conditions. We expect clarity on this difficult trade-off to emerge in the near future as the Fed assesses evolving inflation dynamics alongside labor market developments. This pivotal decision will shape monetary policy direction and its broader impact on the economy.

We do not anticipate that the economy will enter a recession in the near term, nor do we foresee a sustained bear market occurring. However, it is important to recognize that a modest market correction appears overdue based on current valuations and market dynamics. Such a correction would be a natural and healthy adjustment within an overall positive market environment.

That said, defensive sectors—which typically provide stability during periods of market uncertainty—are currently not priced low enough to fully support the broader market should the primary leadership sectors falter. While these sectors often act as a cushion during downturns, their present valuation levels suggest limited capacity to prevent a decline if market leadership weakens substantially.

Therefore, investors should remain attentive to market conditions and sector leadership trends, as these will play a critical role in sustaining market momentum over the coming months. Maintaining a balanced and disciplined approach is advisable given the nuanced outlook for both growth and defensive opportunities in this environment.

If the market reaches a trough, it would suggest a renewed return of recession fears—fears that had previously been dismissed or largely subsided. The critical question then becomes: what catalyst might trigger this resurgence of concern?

One plausible trigger could be growing apprehension that the Federal Reserve’s forthcoming rate cuts are what some market participants might term "hawkish cuts." This concept reflects the possibility that, despite rate reductions, inflation remains elevated—around 3%—and the Fed’s policy easing could be perceived as insufficiently accommodative or delayed relative to the pace of a deteriorating labor market.

In other words, investors might fear that the Fed’s rate cuts will lag behind worsening employment conditions, causing a disconnect between monetary policy and economic realities. This could lead to heightened uncertainty and volatility, reigniting recession fears and undermining market confidence. Understanding this dynamic is crucial as the Fed moves toward expected rate cuts in the coming months amid still sticky inflation and evolving labor market signals. This delicate balance will likely be a key focus of market participants and policymakers alike.