The Fed Faces a ‘Double-Dog Dare’
Oil pressure continues as investors await key inflation news.
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The single most important market issue right now is that oil is still moving higher Thursday morning. Brent is above $100 after a week in which Iran shifted from attacking commercial shipping to attacking American warships.
The PPI wholesale inflation report hits at 8:30 Thursday morning, with a consensus headline of 0.4% and core around 0.2% to 0.3%. The annual figures will grab attention. The headline is expected to be around 5.2% and the core near 4.6%. Those numbers aren’t calming and give the Fed motivation to raise rates. The European Central Bank is expected to raise rates by a quarter point Thursday morning, which won’t help the market mood.
Iran Is Escalating on Purpose
At least three times in the past week, Iranian forces have launched missiles at American warships, including an aircraft carrier, taking direct aim at the U.S. Navy in a way they had not done since the war began. That is a deliberate escalation, driven by the fact that the shutdown of the Strait of Hormuz is strangling its economy, and it has decided aggressive attacks are the only option it has left.
President Trump said Wednesday that talks could still happen and predicted the conflict would end after the U.S. midterm elections. Two more months of this is a substantial problem for the market, and we are seeing that reflected in the poor price action.
Friday Is a Dare
The PPI report Thursday morning will give us a clue as to what the Fed does next, but the CPI report Friday will be the deciding factor. The recent poor bond action is the market pricing in a rate increase that Fed Chair Warsh has never promised. Warsh will have to deliver the hike or provide an explanation for why it is not needed at this time. A former senior Fed economist called it the market double-dog daring the new chair.
Economists expect core prices rose 0.2% in August. Fed Governor Waller said last week he would vote to hold if that is the number and would support a hike if it comes in higher. A single tenth of a percentage point may be enough to trigger a rate hike.
Fed members that favor a hike are focused on what lies ahead. A war that has kept oil elevated for six months, new tariffs, and a massive AI buildout will keep inflation pressures bubbling up. That is the argument that the market has been struggling with since Jackson Hole.
A Trillion Dollars of Stimulus in an Inflation Fight
Trump proposed a $5,000 payment to Americans last night, conditional on Republicans retaining control of Congress in the midterms. Bond yields ticked higher on this Thursday morning, though the move was modest and probably reflects oil more than the proposal.
A president proposing a trillion dollars of fiscal stimulus in the same week the Fed is debating a hike to fight inflation is the kind of inconsistency that causes bond market turmoil. The stress on the bond market continues to build and that is ultimately what drives stocks more than anything else.
Game Plan
Nothing in the market right now supports new buying. We have to wait for the inflation news to hit and see how the market reacts. Once that settles, the charts will develop, and we can decide what action to take.
The positions I hold are sized for a stretch like this, and I am not adding to them unless there are some sizable dislocations. What I am watching is whether the bond market can hold its August lows through two inflation reports. That will determine whether the pressure on stocks stays orderly or becomes something more dire. My shopping list is long, and it is getting longer, which is exactly how it should work.
At the time of publication, Rev Shark had no positions in any securities mentioned.
