Will CPI Trigger a Rate Hike? #CPIWatch

CPI week has turned into a much bigger rate-policy test than I expected.

On September 4, August nonfarm payrolls came in at 162K, far above the roughly 56K expected, while unemployment held at 4.1%. July payrolls were also revised up to 21K from the previous 23K decline. The jobs report pushed the probability of a September Fed hike higher, but CPI is now the number that can confirm or challenge that view.

And the inflation backdrop isn't exactly comfortable.

July CPI was 3.4% YoY, while core CPI was 2.5% YoY, both still above the Fed's 2% inflation target. For August, economists were expecting headline CPI to rise 0.4% MoM and 3.4% YoY, with core CPI at 0.2% MoM and 2.4% YoY. The report is scheduled for September 11 at 8:30 AM ET.

Then came another warning sign. August PPI rose 0.4% MoM, with annual producer-price inflation reaching 5.4%, adding more pressure to the inflation story. Markets were already pricing around a 70% chance of a 25 bp hike at the September 15–16 Fed meeting.

My take: I'm leaning bearish on stocks and bullish on the rate-hike trade if CPI beats expectations. A hot print could push Treasury yields and the dollar higher while putting pressure on risk assets and gold.

But if CPI comes in soft, this positioning can reverse quickly. With payrolls beating expectations and CPI in focus, what do you expect next: a Fed hike, a hold, or a bullish/bearish move in markets?
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