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September may have a reputation for being a tough month for stocks, but Monday didn’t reflect that usual anxiety. Investors seemed relatively unfazed, even optimistic, as they pinned their hopes on the Federal Reserve kicking off an easing cycle. Even with a modest 25-basis-point rate cut, the sentiment was that it could offer some much-needed relief to both consumers and the broader economy. At least for now, the mood is more "cautious optimism" than doom and gloom.

Wall Street's major indexes ended higher on Monday as the bears retreated, giving investors a pause to pick through Friday’s market rubble and scoop up some bargains ahead of crucial inflation reports and the Fed's next policy move. With markets still hovering in the realm of "opinion" rather than hard evidence, there's room for interpretation—and for opportunistic buyers to step in. While the labour market is cooling, it's far from frozen, and Q2 GDP was revised up to a solid 3.0% annualized gain, keeping the soft-landing narrative firmly on the table.

For now, the Fed likely won’t feel the need to hit the panic button with a jumbo rate cut, but stock traders—unlike their bond and commodity counterparts—haven’t fully grasped the depth of the potential labour market weakness yet. That leaves the door open for further, potentially sizable market corrections as reality catches down. Expect the worry meter to creep higher if the employment picture deteriorates further.

This week, all eyes are on Wednesday’s consumer inflation print, followed by Thursday’s producer inflation data, which will provide critical clues about pricing pressures before the Fed’s Sept. 18 decision. The hope is that inflation will stay cool enough to keep the 240 basis points of Fed rate cuts baked into the market, offering the economic lifeline needed to keep things afloat. Hence, AI chip titan Nvidia (NVDA) rose by over 3%, while Tesla (TSLA) gained by more than 2%, reflecting optimism in the tech and growth sectors.

Despite the number of Fed rate cuts already priced in and the sustained decline in yields along the curve, the issue hiding in plain sight is the lack of any meaningful re-acceleration in growth data. This suggests that major U.S. indexes are drifting out of phase with the economy’s underlying fundamentals. Bonds and commodities, which tend to be more closely aligned with economic reality, seem to be reflecting this divergence. The disconnect between stock market optimism and the broader economic outlook raises a pressing question: how long can equities float above the fray before gravity pulls them back to reality?

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