CPI Resurges on Oil Shock: Will the Fed Hike Again?

Grant Calloway

Good morning, and welcome to Markets Daily. I'm Grant Calloway. Yesterday I left you with one question: could the bank led strength broaden out, or would bonds and the Nasdaq drag it down? The answer arrived at 8:30 Eastern, right on schedule.

Grant Calloway

Futures were green early this morning, up about a fifth of a percent on the S&P, with ASML and BlackRock doing the heavy lifting. Then the September Consumer Price Index crossed the wires, and the green went away. Per the Bureau of Labor Statistics, headline CPI rose 0.6% on the month, which matched forecasts. But the year over year number came in at 3.7%, against 3.6% expected and 3.4% in August. A tenth of a percent doesn't sound like much. On this tape, it was plenty.

Grant Calloway

The culprit is the pump. Gasoline jumped 7.1% in September, per the Energy Information Administration, with the Middle East conflict in the backdrop. Core CPI, which strips out food and energy, rose 0.3% on the month and 2.6% year over year, up from 2.4%. So underlying inflation is firmer, but it isn't running away. The catch is that the Fed raised rates 25 basis points last month, to a range of 3.75% to 4%, its first hike in three years, and it flagged more to come. Before this report, the CME's FedWatch tool had about a 22% chance of another hike at the October 27th and 28th meeting. After this one, a hike is back on the table.

Grant Calloway

Now, the tape. At the opening bell, the greatest four hundred milliseconds in capitalism, the Dow was down 85 points, or 0.16%, at 51,585. The S&P 500 fell about 31 points, 0.40%, to roughly 7,774. The Nasdaq Composite did the worst of the three, down 0.63% to just over 27,000. Small caps got hit hard yesterday too, with the Russell 2000 sliding 1.37%, and rate sensitive stocks don't love a hot print.

Grant Calloway

Overnight, Asia leaned lower on oil. South Korea's KOSPI fell 0.44%, Japan's Nikkei barely budged, down 0.05%, and China's CSI 300 dropped 1.36%. Europe was a bit better. The Stoxx 600 was up about half a percent early, and the FTSE 100 was up about a fifth, helped by consumer staples and defense names. Sterling hit a fresh sixteen month high against the euro.

Grant Calloway

Across assets: Brent crude is around 106 dollars a barrel, with WTI in the low 90s, after reports of extended fighting between Saudi Arabia and the Houthis, and two Singapore registered vessels struck in the Strait of Hormuz, one of which sank, per Reuters. The ten year Treasury yield is sitting right around 5.2%, and PIMCO's Dan Ivascyn told Reuters he thinks the peak in yields is still ahead if the Fed tightens again. The dollar firmed after the print. Gold is holding near 4,200 an ounce. And Bitcoin? Bitcoin couldn't care less. It was about 83,400 at 7:15 Eastern, basically flat on the day, with Ethereum around 2,500.

Grant Calloway

Movers, and let's keep it moving. Bank of America is the loser among the big banks, down somewhere between 3% and 7% and sitting right around 50 dollars. Third quarter profit fell 17% to 6.93 billion, or 91 cents a share, against 1.10 expected. A 1.2 billion dollar regulatory penalty over money laundering safeguards, announced yesterday afternoon, did most of the damage. Strip it out and the bank says it earned 1.08 a share. Revenue of 30 billion also missed, as trading and dealmaking cooled.

Grant Calloway

Next door, Morgan Stanley is up about half a percent. Equity trading brought in 5.8 billion against 4.9 billion expected, and wealth management took in a record 232 billion in net new assets, half of it tied to IPOs, per Bloomberg. BlackRock is up three to four percent after adjusted earnings of 15.93 a share beat the 14 dollar range analysts expected. It pulled in 205 billion in net inflows for the quarter, 135 billion of it into iShares.

Grant Calloway

Away from finance: ASML is up about 3% after a profit beat and a raised fourth quarter sales outlook, with customers talking orders out to 2030. Progressive is down about 8% after its results. UnitedHealth is up another 2.8% or so, building on yesterday's guidance raise to at least 20.50 a share. And CoreWeave is down about 12%, the worst of the priority names I'm tracking. Netflix is lower after the Wall Street Journal reported it's cutting about 6% of its jobs.

Grant Calloway

A quick word from our sponsor. Markets Daily is brought to you by Jellypod. If you've ever wanted your own reading pile turned into a podcast, head to jellypod.com. Now, back to the tape.

Grant Calloway

Bull versus Bear. The question: does a 3.7% print force the Fed's hand, or is this fuel noise the market can look through?

Grant Calloway

Here's the bull. Look at core. 0.3% for a second straight month, 2.6% over the year, and the headline spike is a gasoline story, up 7.1%. Fed Governor Michelle Bowman said there's time to wait and see, and New York Fed President John Williams, per Bloomberg, sees no need for a hike in 2027. Meanwhile, the money keeps flowing. BlackRock took in 205 billion in a quarter. Morgan Stanley's wealth business had a record haul. ASML says its order book stretches to 2030. That is not what a stalling economy looks like.

Grant Calloway

Now the bear, and he's got a good argument. A ten year yield at 5.2% and headline inflation at 3.7% leaves the Fed no room to cut and maybe some pressure to hike. Jamie Dimon told us yesterday that forces are shifting under the surface, and today Bank of America ate a 17% profit drop. Brent at 106 doesn't stay at the pump, it seeps into freight and services. And Domino's told us yesterday it expects the macro environment to remain an overhang on the consumer. That's how a valuation squeeze becomes an earnings problem.

Grant Calloway

Where do I land? Both of them are right about the facts, and that's what makes this tape tight as a drum. The bull is right that core is calm. The bear is right that it doesn't matter if oil stays up, because the Fed told us last month it would keep tightening. I'd say the bull has the earnings and the bear has the bond market, and the bond market usually gets the last word. I'd watch whether Brent holds this level. That tells you which of them is winning.

Grant Calloway

On Deck. The CPI is out, and the Treasury auctions seventeen week bills at 11:30 Eastern. The main event is at 2 p.m. Eastern, the Fed's Beige Book. I'll be listening for whether businesses say they can absorb higher energy costs or plan to pass them along, and for how they describe hiring. Fed officials are also talking all day around the IMF and World Bank meetings. The big bank earnings are mostly behind us now, so the macro is driving.

Grant Calloway

What matters most today: the Beige Book, the ten year yield, and Brent. Tune in tomorrow morning for more. The old floor saying is that the market can stay irrational longer than you can stay solvent, and today the market is asking whether three point seven is the new problem or just the old one with a bigger gas bill. This podcast is for educational purposes only and is not investment advice. I'm Grant Calloway. See you tomorrow.