Will August CPI Give the Fed Breathing Room?: 8 Key Items Shaping the Stock Market Friday

These are the early headlines and other items poised to influence the market at the start of trading Friday. As we share this collection of market drivers, futures point to a positive start when U.S. equity markets open. Given that we’ll get the August CPI report at 8:30 AM ET, we’ll want to revisit those futures soon after the CPI data is published.

1. A majority of economists see the Federal Reserve holding interest rates steady at this month’s meeting and through the end of 2027, even as market odds for a rate hike have increased, according to a Bloomberg survey. Economists cited tempering inflation and the proximity of the midterm elections in the US as reasons for policymakers to leave rates unchanged at their Sept. 15-16 meeting and again in October. Just 13 of 48 respondents, polled Sept. 4-9, said they expected a rate increase this month. That contrasts sharply with investors, who see a 70% chance of a hike next week, perhaps reflecting the unusual level of uncertainty surrounding the near-term direction of monetary policy under Fed Chairman Kevin Warsh. (Bloomberg)

The discrepancy between what economists and the market expect means this morning’s August CPI report could very well determine what the Fed does next week. While the headline CPI figure is expected to remain at 3.4% on a year-over-year basis in August, the market consensus sees the core figure ticking lower to 2.4% on that basis and 0.2% on a sequential one. Should the reported core figures come in lower than those, we could see a shift in rate-hike probabilities captured by the CME FedWatch Tool.

Even though the market may focus on the core figures, we recognize the factors stripped out of that view on inflation, such as food and gas, are pressuring consumer budgets.

2. The global bond selloff pushed U.S. 10-year Treasury yields near the closely watched 5% level on Friday as inflationary fears stemming from oil prices surging well beyond $100 a barrel and rising chances of a near-term U.S. rate hike rattled investors… A sustained break for 10-year Treasuries above 5% is seen by some analysts as a critical line that could make bonds more competitive with stocks, potentially pulling dollars out of equity markets. Higher Treasury yields also flow through to the broader economy through costlier mortgages, auto and consumer loans, and more expensive corporate and municipal borrowing. (Reuters)

3. The war with Iran is now more than half a year old with no signs of ending, and there’s precious little talk lately from President Donald Trump and his administration that a negotiated conclusion is imminent. What’s left is a price tag that keeps climbing and the promise that the war’s costs will drop precipitously once America wins a war it can’t seem to end… Though the price of gasoline is eminently visible to the average taxpayer, it might be the smallest line on the bill that’s coming due. The war’s cost to the average American household’s pocketbook is about $1,650 as of last week, a combination of energy, interest rates and the costs of the war, according to Mark Zandi, chief economist at Moody’s Analytic. It’s a number he said grows by the day. (Politico) Diesel prices rose above $6 a gallon for the first time ever, raising the risk of further energy-driven inflation just ahead of peak demand season for the fuel. (Bloomberg)

Because diesel is the main fuel for trucks, trains, tractors and other heavy machinery, higher diesel prices mean higher prices for a variety of goods ranging from groceries to consumer products. Factor in the more than 40% move in gas prices since the end of February and the impact off higher interest rates, and the flow through of diesel prices will further strain consumer disposable spending dollars.

4. Oracle topped Wall Street estimates for quarterly results on Thursday and reported a smaller cash burn than expected, offering investors confidence that its AI investments ‌were generating returns without squeezing its balance sheet… In the first fiscal quarter, Oracle booked more than $30 billion of additional AI cloud contracts, boosting its revenue backlog to $664 billion… But more importantly, Oracle said that most of the newly contracted revenue will not require large cash outlays for chips, helping it maintain its annual spending target of $90 billion to $95 billion. (Reuters)

Oracle’s (ORCL) results are the latest that point to rising AI adoption and expanding usage in the enterprise and governments. While the market is breathing a sigh of relief, the company is, at least for now, not opting to increase its capex for the current fiscal year, but that $664 billion backlog suggests another leg up in the following one.

Supporting that view…

5. Microsoft Corp. plans to more than triple its data center capacity, an effort that could help the company overcome a computing shortage that has forced it to turn away some AI and cloud business. The company’s globe-spanning network of data centers will have more than 38 gigawatts of capacity in 2032, up from about 12 gigawatts now, according to people familiar with the plans… The road map includes company-owned and leased facilities and excludes computing power rented from so-called neoclouds like Coreweave Inc., said the people, who requested anonymity to discuss private information. (Bloomberg)

Microsoft’s (MSFT) admission reminds us of the multi-year buildout for data center capacity being fueled by not only AI adoption and usage, but, as Nvidia (NVDA) CEO Jensen Huang noted this week, cybersecurity. We’ve also discussed the demands that autonomous driving will place on networks and data centers as that usage climbs. While the market seems to be focused on when data center spending will peak, we’re coming around to thinking the reality is we are likely to see a sustained level of spending over the coming few years. That possibility keeps us long-term bullish on several of the Portfolio’s holdings and backs the multi-year chip forecasts from some of those holdings.

The note that Microsoft’s roadmap will including partner capacity is a sharp reminder that we and the market will need to focus more on “industry” capacity than any one individual company. For us, that means continuing to focus on overall adoption and usage metrics for drivers of networking and data center capacity to gauge when industry capacity levels may be tipping into excessive levels.

6. The Pentagon is in talks to lend roughly $5 billion to AI cloud-computing startup Fluidstack, according to people familiar with the matter, adding the U.S. military to the growing list of financiers of artificial-intelligence infrastructure… Much of Fluidstack’s demand comes from a broad partnership it struck with Google and Anthropic to help the startup access Google’s tensor processing units. Google has backstopped Fluidstack’s data-center leases, helping bring down those projects’ borrowing costs. (WSJ)

The Pentagon’s move to help fund Fluidstack meshes with its Office of Strategic Capital (OSC) providing loans to companies working in areas deemed critical to U.S. national security. While this particular move, should it be finalized, be one of the larger ones for the OSC, odds are it won’t be the last given technology developments and rising usage inside areas overseen by the Pentagon. As it relates to the demand read through for Fluidstack and the Portfolio, demand for Google’s (GOOGL) TPUs is positive for our shares of Marvell (MRVL) and Broadcom (AVGO).

7. Economic data today per TipRanks: Consumer Price Index (August), University of Michigan Prelim. Consumer Sentiment Index (September), Treasury Budget (August).

8. Companies reporting today per TipRanks: AM – Kroger (KR).

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At the time of publication, TheStreet Pro Portfolio was long AVGO, GOOGL, MRVL, MSFT and NVDA.