Oil, CPI Inflation, and Fed Risk Take Control of the Tape

Markets shifted decisively during the week from an AI capex earnings-driven backdrop to a more macro-driven and uneven tape.

Rates, inflation, petroleum, and Federal Reserve expectations moved back to center stage, with all major equity indexes under pressure. Through Thursday, all major equity indices are down for the week as rising yields and triple-digit oil pressured risk appetite.

The biggest market driver was the renewed surge in crude oil. Brent crude oil futures topped $110 in overnight trading, while WTI crude futures moved above the $104 handle after another round of tanker attacks and escalating U.S.-Iran tensions disrupted energy flows. The Strait of Hormuz remains heavily disrupted, and Red Sea risk has also increased, leaving investors focused on whether the energy shock is becoming more structural than temporary.

Friday’s CPI Data for August Complicates Fed Path

With the August Consumer Price Index (CPI) data release Friday, expectations of a rate hike at next week’s Fed meeting rose from nearly 70% to about 85%, according to the CME FedWatch tool. The August CPI data show headline inflation is running above 3%, while monthly core inflation accelerated more than anticipated. That combination is important, and it likely makes the path toward easier Fed monetary policy more difficult, particularly against a backdrop of elevated energy prices and geopolitical risk.

The raw data: CPI was in line with expectations at a 0.4% gain month over month and 3.4% year over year. The core, excluding food and energy, was 0.3% month over month and 2.4% on a year-over-year basis. The month-over-month core was 0.1% hotter than the 0.2% estimate and the year over year was in line with expectations.

The 10-year yield fell to about 4.92% after the CPI data.

Why Are Treasuries at Multi-Year Highs?

The energy move has fed directly into rates. The 10-year Treasury yield recently jumped to roughly 4.95%, its highest level since October of 2023, as investors priced in higher inflation risk and a greater chance of Fed tightening. The U.S. Department of the Treasury plan to repurchase up to $6 billion of long-term bonds did little to calm the market. Instead, the plan reinforced the view that a relatively small buyback cannot fully offset energy inflation, heavy Treasury supply, and rising term-premium concerns.

Treasury prices (bonds) fall when supply is ample. Yields (interest rates) rise in opposition to price. Higher yields suggest bond demand is low and/ or supply is high or 'heavy'. Yields are rising because higher inflation requires a higher interest rate 'premium' or offset for buyers of bonds due to the higher investment opportunity cost that inflation creates.

How Markets Are Reacting

S&P 500 sector performance reflected macro shocks. Energy was the clear leader, helped by the rally in crude and the renewed geopolitical risk premium. The next-best relative performers were utilities and consumer staples, which held up better as investors looked for defensive cash flow and lower economic sensitivity. The weakest groups were materials, technology, and consumer discretionary. Materials struggled as higher rates and a stronger dollar weighed on cyclical demand, technology sold off as higher yields pressured stock prices and reset valuation multiples, and the consumer discretionary sector lagged as higher fuel prices threatened consumer spending power.

What PPI Is Telling Us

Through Thursday, the major economic release was August PPI. Headline producer prices rose 0.4% month over month and 5.4% year over year. Final demand goods climbed 1.1%, with more than three-fourths of that gain tied to energy, which rose 4.2%. Diesel prices were especially notable, jumping 24.1% in the month. Core producer inflation was less alarming than the headline, but still firm. Final demand, excluding food, energy and trade services rose 0.3% in August and 4.7% from a year earlier.

That report landed just days after a stronger August payrolls report and one day before Today’s CPI release, as noted above, creates a difficult setup for the Fed.

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