Dow surged on hopes of a Fed pivot and a US-China trade deal
·
Wall Street scaled a new life time high, but the
Fed may sound less dovish than expected, as the fine print of US core CPI
indicates elevated inflation
·
Gold slips on easing of US-China trade war tensions
after significant progress in Malaysia talks
On October 24, 2025, apart from the daily Trump TV
reality shows, all focus of the market was also on U.S. inflation data for
September. The US CPI measures the average change over time in the prices paid
by urban consumers for a market basket of consumer goods and services, such as
food, transportation, and shelter. Core CPI excludes the volatile food and
energy categories to provide a clearer view of underlying inflation trends.
On October
24, the BLS data (NSA) shows the annual (y/y) US core CPI inflation rose at 3.0% in August against 3.1% sequentially, lower than the median
market expectations of 3.1% and pre-COVID December’2019 of 2.3%. The 3MRA core
CPI rate is now around 3.1% against 3.2% (y/y) and 3.0% (m/m) vs 2.0% in 2019
(pre-COVID).
Overall,
till September’25, the 3MRA of US core CPI trajectory shows the disinflation process from 2024 may have
stalled around 2.8% in May’25 and is now again hovering above 3.0%; may further
scale to around 3.5% in the coming months or by H1CY26. The US core CPI is
again on the upside soon after Trump announced his Liberation Day (April 2)
tariff and partially implemented it; eventually in partial force from
August'25.
The US core CPI-3MRA
On October 24, the BLS data (SA) also shows the sequential (m/m) US core CPI rose 0.2% in September’25 from 0.3% in the preceding month, and lower than the market expectations of 0.3%.
Overall, the 3MRA of US core CPI is now around 0.3% vs 0.3% yearly and 0.3% sequentially, and 0.2% for December'19 (pre-COVID).
In
September’25, the BLS data shows the US super core CPI inflation (w/o food, fuel/energy, shelter/housing, used cars
& trucks) rose at 2.4% from 2.5% in the prior month, compared to 1.7% in
pre-COVID (Dec’19) times. The US Trimmed Mean CPI (Cleveland Fed) surged 3.2%
in September’25 against 3.3% the prior month and pre-COVID levels of 2.3%.
In
September’25, the US CPI increased by 3.0% against 2.9% in the prior month and
2.4% in the prior year, but below the market expectations of 3.1%. The 3MRA of US CPI was 2.9% vs 2.8% sequentially
and 2.6% yearly; the 3MRA at December’19 (pre-COVID) was 2.1%.
The US food
inflation was 3.1% in September’25
against 3.2% in the prior month and 2.3% in the prior year. The 3MRA of US food
inflation is now 3.1% vs 2.0% in December’19 (pre-COVID). Usually, US food CPI
is always below the total CPI, but when it goes higher, then total CPI surges
above the 3.5-4.0% Fed red line.
In
September’25, the sequential (m/m) US
CPI increased by 0.3% from 0.4% in the prior month, below the median market
expectations of 0.4% and pre-COVID (December 19) levels of 0.3%.
The 3MRA
and the sequential total US CPI are now 0.3% vs 0.3% prior month and 0.2% prior
year.
The US
service inflation was at 3.6% in
September’25 against 3.8% in the prior month and 4.7% in the prior year. The
3MRA was 3.7% vs 2.8% pre-COVID (December 19). The US rent/shelter inflation
was at 3.6% in September’25 vs 3.6% in the prior month and 4.9% in the prior
year. The 3MRA is now 3.6% vs 3.3% pre-COVID times (December 19).
The US rent inflation is now hovering around a new
low since October’21. The US rent inflation is on a downward path since
August’24, when it became almost clear about Trump 2.0 and illegal or even many
legal immigrants started to leave the country, which accelerated after
January-March’25. But now, rent inflation may have bottomed out and may rise in
the coming days as a meaningful part of those illegal/legal immigrants may
again return to the US with proper documentation and to fill up the growing
labor shortage, especially in labor-intensive construction, manufacturing, and
agricultural sectors. Also, tighter mortgage credit norms amid rising
delinquencies & default (another subprime crisis?) are causing lower demand
for housing and subdued inflation.
Overall,
US core Goods inflation was at
1.5% in September’25 vs 1.5% in % prior months and 0.2% pre-COVID (December
19); it bottomed out at -1.7% in May'24 post-COVID after reaching a high 12.5% in
February'22 amid COVID-related supply chain disruptions. Similarly, the US core service inflation (w/o rent) was at 3.7% in
September'25 vs 4.0% in the prior month and 2.2% pre-COVID (December 19). The
US core service inflation topped out at 8.2% in Septenmber'22 and bottomed out
at 2.8% in September'23.
In September’25, the US total inflation was mainly
boosted by higher energy costs due to a +4.1% surge in gasoline y/y.
In September’25, the US core CPI was mainly
dragged by used cars & trucks, transportation services, and rent to some
extent.
Overall,
even if we assume a 0.2-0.3% sequential core CPI rate for the next few months,
the 12-month (y/y) core CPI rate would be around 3.5% on average. The sequential core CPI rate may be around 0.3% in
H2CY25 as the US core inflation may have bottomed out in H1CY26, and the effect
of Trump tariffs would be visible in the coming months. Frontloaded US imported
goods may have been replenished by September-December ’25 (depending on Chinese
tariffs/pause). The 3MRA of US core CPI inflation may scale around 3.5% by
H1CY26.
Tariffs implemented under the Trump administration
are contributing to higher consumer prices, though the pass-through effect
remains moderate as firms deplete inventories and absorb some costs. Goods
inflation is accelerating (e.g., apparel, vehicles), while services inflation
shows signs of softening. At the current & projected R/R of 0.2-0.3%
average sequential rate, the average core CPI for 2026 may be around 3.5% from
3.0% in 2025, even after considering potential effective reduction in Chinese
tariffs (?removal of Fentanyl tariffs of 20% as a part of US-China trade deal
2.0).
The effective US tariffs on merchandise goods are
now approaching 10.5% from April’25 levels of 3.0% and June'25 levels of around
9.1% against 3.5% on average in 2024. Thus, overall, there is only an additional effect of 7% with an equal
distribution among US importers, global exporters, and also US consumers. The
muted effect of higher import duties on inflation through H2CY25 stems from
time lags in price transmission, tariff exemptions, and rollbacks, declining
import volumes, cost absorption by businesses, consumer substitution, and the
structure of inflation metrics.
But the effects of tariffs on corporate and
household balance sheets may be clearly visible from 2026, as by then the
transmissions of comparatively higher tariffs may be visible in the real
economy. If the Trump admin eventually withdraws 20% Fentanyl tariffs on China
and also Canada & Mexico in the coming days, the effective weighted average
tariffs may be around 13.5% and the net increase would be around 10%, out of
which at least 75% would have to be borne by US importers and exporters. This, along with some structural reasons,
suggests that the US core CPI inflation may be elevated in 2026, along with
elevated unemployment. The US economy may face a stagflation-like scenario.
This may keep the Fed cautious and less dovish approach despite Trump's
favoured Fed Chair from H2CY26.
Conclusions
Considering various narratives, the Trump
administration projected a 10% weighted average effective US tariffs in the
longer run. Looking ahead, Trump may withdraw 20% additional Fentanyl tariffs
on China and 25% on Canada and Mexico from October 2025 or January 2026 for
‘satisfactory compliance’ in preventing the smuggling of the synthetic opioid
into the US. This will help the overall weighted average effective US tariffs
rate closer to ~13.5% and the net effect after adjusting previous tariffs
(*~3.5%) will be closer to ~10%.
Trump
has also extended his reciprocal tariffs pause on Chinese goods from August to
Novbember-December’25 to ensure no supply shock for the US economy. Trump may
continue his chaotic tariff policy to get a fair trade deal for the US. If Trump goes on with his higher reciprocal
tariffs @20%, it would cause a supply shock and a higher cost of living for
ordinary Americans, most of whom live on a paycheck-to-paycheck basis.
Further, such tariffs would cause a demand shock in
the future and an all-out recession. This will also cause a loss of Vote Bank
(ordinary Americans) and Note Bank (political funding by corporate America) for
Trump and Republicans. Thus, Trump is bound to blink and may take a less
hawkish tariff position in the coming days, especially on China, Canada,
Mexico, Japan, and the EU, the top five US exporters. The Trump admin may
finalize tariffs by October-December 2025.
Fed may cut
in September, November, and December 2025, even after considering higher Trump
tariffs as transitory. Although the Fed generally talks about
2.0% PCE inflation as a price stability target, in reality, it maintains 1.5%
core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9%
average inflation (PCE+CPI) targets, US Congress has entrusted along with
maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline
unemployment rate. Fed may exit QT for $5T UST; MBS QT will continue;
Fed may replace MBS depletion with UST in the future in a systematic way; this
may help bond prices to go higher and yields lower to pacify Trump & Co.
By pressuring the Fed, US President Trump is
complicating the Fed’s job more and also hurting the future credibility of the
Fed as an independent institution. This may hurt the USD's credibility as a
global reserve currency in the future, and the US may be losing the advantage
of its greatest weapon, the USD hegemony, which it uses for geopolitical
influence and becoming the number one superpower in the world. China is now
focusing more on making the Yuan (CNY) an alternative global reserve currency
and rapidly accumulating Gold to support the intrinsic value of its currency.
After the
September '25 rate cut of 25 bps, another 25 bps Fed rate cut each in October
and December is now almost certain.
The repo rate in December'25 would be at 3.75%. Going forward, another 50-75
bps rate cut in 2026 may not be assured as US core CPI inflation may surge
towards 3.50% average in 2026 from 3.00% in 2025. Fed may cut only 25 bps or
even opt for no cuts in 2026 if US unemployment rate continues to hover around
4.30% or edges down to 4.00% on average in 2026 against 3.50% core CPI
inflation.
Market wrap
Wall
Street Futures and Gold surged Friday, October 24, on hopes of two more Fed
rate cuts in October and December'25 after the US core inflation report. The
S&P 500 rose 0.8%, the Nasdaq gained 1% and the Dow added 470 points. Tech
led the rally as AMD and IBM jumped after IBM said it had successfully run a
key quantum error-correction algorithm on AMD chips, lifting sentiment across
the sector. Intel rose after returning to profitability and issuing an upbeat
revenue forecast. Nvidia, Broadcom, and Alphabet climbed 3.1%.
Financials
rallied on the prospect that easier Fed monetary policy will revive lending.
Ford jumped after the automaker posted strong third-quarter results that beat
expectations. For the week, the S&P 500 rose about 1.8%, the Nasdaq and the
Dow gained 2%.
Fast forward, Wall Street Futures
surged more to a fresh life time high early Monday Asian Session on hopes of
US-China Trade Deal 2.0. On Sunday, top U.S. and Chinese
negotiators said they reached a consensus on key disputes, paving the way for
Presidents Trump and Xi to meet later this week in South Korea and finalize a
trade deal aimed at easing tensions. Gold slips on easing of Trump trade war
tantrum.
After
two days of talks in Malaysia, officials announced that both sides had agreed on
issues including export controls, fentanyl, and shipping levies. U.S. Treasury
Secretary Scott Bessent told CBS News that Trump’s threat of 100% tariffs on
Chinese goods “is effectively off the table,” adding that China would make
“substantial” soybean purchases and delay its rare-earth export controls “for a
year while they re-examine it.” He said the leaders are expected to extend the
tariff truce, resolve differences over TikTok, and secure rare-earth supplies
vital to high-tech industries. Bessent also noted that Trump and Xi plan to
discuss a global peace initiative, with Trump hoping to enlist Xi’s help in
ending Russia’s war in Ukraine.
As per China:
Both
sides stood firm (giving face to everyone); eventually, they agreed on a
preliminary consensus, but awaited superior approval. If approved, Xi and Trump
can meet in South Korea:
Discussions include
·
Export control concerns (likely address
concerns such as expediting approval channel, but unlikely China will remove
this unless the US removes tech control)
·
Extension of suspension of the reciprocal
tariff (looks like another 90-day extension)
·
Fentanyl and anti-drug cooperation (this
led to a 20% tariff on Chinese products and China's retaliation with a 10-15%
tariff on US energy and agricultural imports. If the US removes the 20% tariff,
China will do the same, opening the door for soybean imports from the US, a key
political concern for Trump
·
Expansion of bilateral trade (this is
completely new. Expanding trade while trade between the 2 shrinking fast
·
A 301 investigation on vessel fee
(US-imposed vessel fee on Chinese ships based on a toolbox developed by former
USTR Katherine Tai, China retaliated.
Li Chenggang, China’s Vice Minister of Commerce and
International Trade Negotiation Representative, stated on October 26 that China
and the US held constructive discussions over a range of critical topics during
more than a day of intense negotiations. The agenda included export control
concerns from both sides, extending the suspension period for reciprocal
tariffs, issues related to fentanyl tariffs and anti-drug cooperation, further
expansion of bilateral trade, and US measures under Section 301 concerning
vessel fees. While the US maintained a tough stance, China firmly defended its
interests. Both sides explored practical solutions to address mutual concerns
and reached a preliminary consensus on the discussed issues. The next step will
involve internal approval procedures by each party.
CHINA'S
VICE PREMIER HE:
·
HOPES THAT THE
US AND CHINA WILL MEET EACH OTHER HALFWAY
·
SHOULD JOINTLY
IMPLEMENT THE CONSENSUS REACHED
·
CHINA, US SHOULD
FIND WAYS TO PROPERLY ADDRESS EACH OTHER'S CONCERNS THROUGH EQUAL DIALOGUE AND
CONSULTATION
U.S.
TREASURY'S BESSENT:
·
CHINA IS READY
TO MAKE A TRADE DEAL
·
U.S., CHINA WILL
BE ABLE TO DISCUSS MORE BALANCED TRADE, AVOID 100% TARIFF ON CHINESE GOODS
·
OVERALL
INFLATION HAS COME DOWN SINCE TRUMP TOOK OFFICE
·
I AM CONFIDENT
THAT INFLATION WILL FALL FURTHER TOWARDS THE FEDERAL RESERVE'S 2% TARGET
·
GOVERNMENT
SHUTDOWN IS 'STARTING TO EAT INTO THE MUSCLE' OF U.S. ECONOMY
Bottom
line:
Wall Street futures made a new life time high,
while Gold slips on progress of the US-China trade deal. Looking ahead, we may
expect a healthy correction as the Fed may sound less dovish than expected on
October 29, 2025; the Fed may not indicate further rate cuts in the foreseeable
future, as the US may face a stagflation-like scenario (higher unemployment and
higher inflation) by early 2026.
Technical
outlook: DJ-30, NQ-100, SPX-500 and Gold
Looking
ahead, whatever may be the narrative, technically Dow Future (CMP: 47700) now has to sustain over 48000 for a
further rally to 48300 and 48600/49000-49700/50000 in the coming days;
otherwise sustaining below 47900-47700, DJ-30 may fall to 47200/47000-46500/46200
and further 45500/44950-44500/44200 and 43500 in the coming days.
Similarly,
NQ-100 Future (25800) now has
to sustain over 26100 for a further rally to 26200-26500 in the coming days; otherwise,
sustaining below 25750, NQ-100 may fall to 25300/25000-24700/24500-24300/24300
and 23700/23400/23000 and 22600/22400 in the coming days.
Looking at
the chart, technically SPX-500
(CMP: 6880) now has to sustain over 7050-7100 for a further rally to 7200/7300-7500/8300
in the coming days; otherwise, sustaining below 7000/6900-6800/6750, may fall
to 6650/6595 and 6490/6450-6375/6300-6250/6200 and further fall to 6080 in the
coming days.
