Wholesale Inflation Runs Hot
Wholesale inflation in August came in hotter than expected. The producer price index (PPI), which tracks prices sellers get before goods reach shoppers, rose 0.4% for the month and 5.4% from a year ago - the fastest yearly pace this year. Goods prices jumped 1.1%, with energy costs the main driver. Core PPI, which strips out food and energy, rose 4.6% year-over-year.
Markets React: Higher Yields, Rate Hike Bets Rise
The hot reading pushed investors to expect a Fed rate hike next week. Treasury yields jumped, with the 10-year yield going above 4.9% for the first time since 2023. Stocks came under pressure as markets faced the chance the Fed keeps rates higher for longer, or raises rates at next week's meeting. After the report, traders pushed the odds of a rate increase to about 70% in the morning.
Oil Back Above $100
Oil prices added to hike expectations. Crude is back above $100 a barrel amid fresh escalation between the US and Iran, raising concerns about global energy supplies. Brent crude is over $108; WTI is almost at $103. This followed Iran saying it attacked 10 ships near the Strait of Hormuz after the US destroyed five Iranian oil tankers. The market worry is that more disruption to shipping through Hormuz could tighten an already constrained physical oil market. Goldman Sachs (GS) warned crude could move above $120, which would put renewed pressure on inflation expectations and add another complication for the Fed.
CPI on Deck
The PPI report raised the stakes for the consumer price index (CPI) data due in the morning. Economists expect headline CPI to rise 0.4% in August and core CPI to rise 0.2%. That would put annual headline inflation around 3.4% and core inflation near 2.4%. Those figures, if in line, would not mean runaway inflation, but they stay above the Fed's 2% target. A big potential catalyst is coming in the morning.
