The latest CPI report landed mostly in line, but core inflation ran a little hot. On a month-over-month basis prices rose 0.3%, above the 0.2% forecast, a tenth of a percent over expectations. Markets waited on this number to judge whether it would push the Federal Reserve to act next week. It probably does.
Right after the report, the implied odds of a rate hike as soon as next week sat in the 85% to 90% range. Governor Waller had signaled he was watching this closely, with the idea that a strong print could move voters from holding rates to raising them. Whether a tenth of a percent above forecast is enough to shift that thinking is an open question, but the read here is that it likely is.
At his Jackson Hole speech, Kevin Warsh pointed to underlying inflation trends, especially the PCE measure. A hot core reading does nothing to change that view. New York Fed President John Williams has said he needs to see monthly core inflation at 0.2% or less to trust that inflation is moving down to 2% in a lasting way. Today's number came in above that mark. Nothing here shows the disinflation trend is fully back.
Oil, Yields, and Resilient Earnings
This week has been about investors adjusting to a tougher economic backdrop: higher oil, higher yields, and uncertainty over where the Fed goes from here. The core CPI reading a basis point above estimates could lock in expectations for a hike next week.
Two price levels matter because they have historically hurt both stocks and the economy. The first is $100-a-barrel oil, for both Brent and WTI. There was some relief today, but crude has climbed to levels not seen in months. The second is the 10-year Treasury yield pushing toward 5%. That level has brought consolidation and volatility to equities and squeezes stock valuations.
Even so, the anchor is earnings, and stocks have held up well through all of this. The S&P 500 sits only 2% to 3% below its all-time high. In the last two months alone, analysts have raised their earnings estimates for next year by 4%. That strength explains why the market has not fallen more despite the macro turbulence. Stocks hit record highs when the market was pricing in a rate cut; now they are pricing in a hike and have still rallied to fresh highs.
What to Watch at the FOMC
Warsh will likely keep saying little, so direct guidance from him is not expected. The meeting still brings updated economic projections and the dot plot. Despite Warsh's dislike of the dot plot, it will still appear even if he does not submit his own dot. That gives a read on how committee members, both voters and non-voters, see the path of rate hikes ahead.
The bigger issue is not just a possible hike next week but the path after it. Markets are starting to price in not one or two hikes but perhaps three to four over the next 12 months. The base case here is that this may be a midcycle adjustment that undoes some of the so-called insurance cuts from last year. But if inflation stays stubborn and sticky, and rates rise while inflation holds above 2% or near 3% as core PCE has, the cycle could run longer than markets now expect. We are not there yet. The key signal will be the dots: how many officials project two or more hikes over the next 12 months.
Buying Opportunities and the Risk
Ed Yardeni has framed September as a weaker month that still offers a buying opportunity, with things turning out fine if Treasury Secretary Bessent moves aggressively to head off a spike above 5%. That 5% level on the 10-year and $100 on oil are the levels to watch.
For the rest of the year, expect the same range-bound trading in equities given all the macro uncertainty. If the earnings picture stays intact with estimates where they are, it is a good buying opportunity for anyone able to act. The risk is clear: if a 5% yield and $100 oil seep into corporate earnings estimates, that becomes a problem for markets. Heavy corporate debt issuance adds to the concern, since it feeds into valuations and earnings expectations. All of this comes from the fixed income research and strategy team at Charles Schwab (SCHW).
