Fed rate hike probability is nearing 90%, yet U.S. stocks are rising.
This may be the most understandable price signal from last night.
U.S. August Core CPI rose 0.3% month over month, above expectations of 0.2%.
After the data came out, the probability of a 25bp Fed rate hike next week climbed all the way to nearly 90%.
But on the other side:
S&P 500 +0.86%
Nasdaq +0.96%
Dow +0.98%
Why didn’t a somewhat hot CPI continue to punish risk assets?
Because the market’s real trading focus has started to change.
First, the September rate hike is getting closer to being fully priced in.
The question is no longer:
“Will the Fed hike?”
It has shifted to:
“After this hike, will they keep going?”
The second signal is even more important:
The 10Y yield did not break above 5%.
After the CPI release, the U.S. 10Y yield briefly touched close to 4.98%, but then pulled back to around 4.93%.
That means:
Fed is more likely to hike ≠ long-term capital costs must keep spiraling out of control.
As we discussed yesterday, Core 0.3% is the gray zone that needs price confirmation the most.
Now the market is giving the answer:
More hawkish Fed pricing, but the long end hasn’t deteriorated further.
So high-duration assets have been given some breathing room.
Third, oil prices also helped.
Brent fell back from near $110 and ultimately closed around $104.6.
Even though the whole week was still up more than 8%, at least last night’s most extreme transmission stopped:
Oil ↑ → Inflation ↑ → Long-end yields ↑
It didn’t keep feeding through.
So what truly mattered last night wasn’t:
“The CPI is hot—why are stocks still rising?”
Instead, the market is shifting from:
“Will the Fed hike?”
to:
“This is a one-off hike, or the start of a new Tightening Cycle?”
Next week’s FOMC will determine the direction of risk assets by answering that latter question.
Another hike is increasingly nearing price-in.
What’s still not priced in is how many more hikes there might be after that.
This may be the most understandable price signal from last night.
U.S. August Core CPI rose 0.3% month over month, above expectations of 0.2%.
After the data came out, the probability of a 25bp Fed rate hike next week climbed all the way to nearly 90%.
But on the other side:
S&P 500 +0.86%
Nasdaq +0.96%
Dow +0.98%
Why didn’t a somewhat hot CPI continue to punish risk assets?
Because the market’s real trading focus has started to change.
First, the September rate hike is getting closer to being fully priced in.
The question is no longer:
“Will the Fed hike?”
It has shifted to:
“After this hike, will they keep going?”
The second signal is even more important:
The 10Y yield did not break above 5%.
After the CPI release, the U.S. 10Y yield briefly touched close to 4.98%, but then pulled back to around 4.93%.
That means:
Fed is more likely to hike ≠ long-term capital costs must keep spiraling out of control.
As we discussed yesterday, Core 0.3% is the gray zone that needs price confirmation the most.
Now the market is giving the answer:
More hawkish Fed pricing, but the long end hasn’t deteriorated further.
So high-duration assets have been given some breathing room.
Third, oil prices also helped.
Brent fell back from near $110 and ultimately closed around $104.6.
Even though the whole week was still up more than 8%, at least last night’s most extreme transmission stopped:
Oil ↑ → Inflation ↑ → Long-end yields ↑
It didn’t keep feeding through.
So what truly mattered last night wasn’t:
“The CPI is hot—why are stocks still rising?”
Instead, the market is shifting from:
“Will the Fed hike?”
to:
“This is a one-off hike, or the start of a new Tightening Cycle?”
Next week’s FOMC will determine the direction of risk assets by answering that latter question.
Another hike is increasingly nearing price-in.
What’s still not priced in is how many more hikes there might be after that.
