The miniscule drop in July inflation numbers excited the markets. The Nasdaq jumped by 2.4%, the S&P jumped 1.7% and the dollar weakened.
The market convinced themselves that the Fed was going to pivot. Move away from raising interest rates to pausing at the next Fed meeting, which is in September.
This despite the fact that 8.5% inflation, while below 9.1%, is way higher than the Fed's target of 2%.
The Fed may slow the pace of rate rises, but it's unlikely that they'll pause while unemployment is below 4.5%.
As for the rate cuts the market is expecting next year - again, this seems unlikely. The Fed will probably raise rates to 3% and then seek to hold steady at that rate.