The Fed and Inflation Data
CPI came in as expected, up 0.4% month over month, matching street forecasts. PPI landed the day before, roughly in line with consensus. The core CPI number rose 0.3% month over month, running a bit hotter than expected. The market took the print well.
The Fed should not hike here. Probability markets tell a different story. CME and Polymarket both show over an 80% chance that Kevin Warsh raises rates next week. The inflation prints give him the cover he needs to move.
Still, the strongest contrarian call is that the Fed holds. The reasoning is practical. Warsh has said again and again that he wants the market playing the ball on the field. When you break down what is driving the inflation numbers, it traces back to rising oil prices, climbing higher and higher. WTI crude sits near $100 and Brent nearly touched $110. Oil has moved in lockstep with inflation. A 25 basis point hike will not dent that pressure. The real fix for inflation is a resolution in Iran, not a rate move.
Oil, the Iran War, and the Market
There is no telling the exact day peace comes to Iran. If that day were known, you would know exactly when oil starts falling. The conflict keeps producing skirmish after skirmish. The key worry is that it stays kinetic - active fighting. As long as it stays kinetic, volatility persists, especially in oil, and the market stays fixated on Iran.
Oil at $100 a barrel becomes a stock picker on its own. It puts at least a short-term cap on the whole market. But higher oil actually helps the AI trade. Through this conflict, the AI trade has been the only durable part of the market during oil's peaks. Investors move to it because they see enough growth there to outpace the inflation that oil brings. So in the short term, expensive oil benefits AI names.
A Durable Market Despite a Huge Headwind
The broader market is very durable. Coming into this year, the base case was three interest rate cuts, a 0.75% reduction, which is what investors and the street expected. Now the probabilities point to the opposite: a base case of two rate increases, 50 basis points, by year-end. That is a 1.25% swing in expectations - a large headwind. Even so, the S&P 500 sits about 2.5% below its all-time high.
Without the war in Iran, the S&P would not just be at 8,000; it might be closer to 9,000. The market deserves more credit for holding up.
Year-End Target and What Gets Us There
The year-end target is 8,000. Getting there means pushing through the next couple months of uncertainty. Next week should bring much more clarity on the Fed's direction. Even if Warsh hikes - and probability says he will - any pullback should be short-lived. The Iran conflict cannot run forever with oil at these prices. Political pressure is too high. This is not a popular war with the average American, which is a reason for hope.
Treasury Yields
Yields are another question mark the market is digesting. Everyone worries about the US 10-year Treasury hitting 5%. That yield is more likely to peak and turn back down than to keep climbing. Expect a move lower before any run toward a 6% handle.
Stock Pick: Meta (META)
Meta (META) is a favorite here, along with Micron (MU) and Uber (UBER). META has had a big run this week. It has finally cleared the regulatory pressure that hung over it; several settlements are now behind the company. Muse Spark 3 is performing extremely well. Zuckerberg has the company pointed the right way with open source and strong performance. With the negative headlines gone and a real positive turn in the AI story, the case for META is bullish.
