Trump Trade War Fuels Inflation as Fed Pivot Sparks Stock Rally and Rate Cut Hopes

Trump’s tariffs are pushing inflation higher, but the Federal Reserve is shifting its focus. At Jackson Hole, Fed Chair Jerome Powell signalled concern about rising job market risks, despite the price pressures caused by trade policies. As a result, markets are now betting on a September rate cut. These expectations triggered a rally in stocks, while pushing the US dollar and Treasury yields lower. The trade war and dovish Fed signals are now working together to reshape global markets.

September Rate Cut Hopes Drive Treasury Yields Lower

Jerome Powell’s Jackson Hole speech marked a shift in tone. He highlighted risks in the labour market instead of focusing solely on inflation. Powell described the current job market as a “curious balance” caused by the slowing demand and supply of workers. This raised concerns that employment losses could happen quickly if conditions worsen.

The bond market reacted immediately. Investors now expect a rate cut at the next Fed meeting on September 17. The 10-year Treasury yield dropped to 4.25%. A break below 4.20% could lead to a deeper decline toward 4.0%. The chart below shows a substantial consolidation in US Treasury yields between 4.00% and 4.60%. A break of either level will likely trigger the next significant move.

However, a drop in US Treasury yields due to Fed rate cuts is not guaranteed. Yields actually rose in late 2024 despite three consecutive rate cuts. At that time, concerns about rising public debt were more substantial than the effect of rate cuts. That risk still exists today.

Moreover, the US fiscal deficit is projected to reach $1.7 trillion in 2026. Tariff receipts may offset part of it, but not enough to solve the underlying structural issue. If bond investors lose confidence, long-term yields could rise sharply again, despite the Fed’s rate cuts.

While the market welcomes a possible rate cut, it also faces growing risks. Lower yields reflect optimism for easier policy. However, rising debt and trade-driven inflation could quickly bring back volatility.

Dow Breaks 45K as Speculative Tech Rally Drives Bull Market

Dow and S&P 500 Break Out as Fed Support Fuels Confidence

The stock market reacted strongly to Powell’s dovish tone. Dow Jones 30 broke above 45,000 for the first time, confirming the bullish breakout in the S&P 500. This move reflects growing confidence that the Fed will support markets if growth slows. The weekly chart for the Dow Jones 30 shows that the breakout above the black dotted line at 45,000 signals continued upside within the ascending broadening wedge pattern.

On the other hand, the S&P 500 reversed higher after Powell’s speech, signalling a continuation of the strong rally toward new highs. The emergence of a broadening wedge pattern following an inverted head and shoulders formation suggests a strong upward move in the S&P 500.

Tech-Led Rally Enters Excess Phase

The market moves in three phases. The first is the accumulation phase, which begins with reviving confidence. The second phase is the public participation phase, driven by the goal of improving earnings. The third is the excess phase, where prices surge based on hopes and speculation.

Current market behaviour in leading tech stocks suggests that the markets may already be in the third phase. The chart below shows the valuations of top technology stocks. Nvidia Corp (NVDA) trades at 40 times projected earnings, Tesla (TSLA) at 204, Microsoft (MSFT) at 32, and Amazon (AMZN) at 34. These high multiples suggest that investors are pricing in strong future growth, even if current results don’t fully justify it.

While the rally is strong, its foundation remains narrow. If tech momentum fades or tariffs further squeeze margins, the market could face a sharp correction. However, the stock market remains in a bullish momentum for now.