The Top Line
Oil jumped past $104 and borrowing costs hit their highest level in a year, and stocks slipped for a fourth straight day. This morning's inflation report likely decides whether the Fed raises rates next week.
We are operating in a late-cycle expansion characterized by an energy shock that has now captured the front end of the curve. August PPI ran 5.4% year over year against 5.3% expected, with diesel alone up 24.1%, and the market responded by repricing the Fed rather than the term premium: the 2-year jumped 15 bps to 4.586% while the 10-year added 11.6 bps to 4.961%. Odds of a September 16 hike rose to nearly 70%. The structural theme is a supply shock being met with a demand-side tool — and existing home sales at 3.98 million, the slowest since June 2025, already show the cost.
Inflation
Wholesale prices rose 5.4% over the past year, faster than forecasters expected. Almost all of that came from fuel, with diesel alone up 24% as conflict in the Middle East squeezed supply. The Federal Reserve is the central bank that raises or lowers interest rates to keep prices stable. Markets now see close to a 70% chance it raises rates next week. This morning's report on what you pay at the store will likely settle the question.
Key Takeaway
If this morning's inflation report runs hot, the Fed almost certainly raises rates next week.
August PPI delivered the split the energy shock made inevitable. Headline rose 0.4% month over month, matching consensus, but the annual rate hit 5.4% against 5.3% expected — while core rose only 0.2%, below the 0.3% forecast, with core holding at 4.6% year over year. The entire beat came from goods: final demand goods jumped 1.1%, energy prices rose 4.2%, and diesel fuel alone surged 24.1%. Processed goods for intermediate demand rose 1.8%, which is the number that matters for pass-through, because intermediate pressure becomes finished-goods pressure with a lag of one to two quarters.
The pressure point is now unambiguous and unambiguously narrow. Shelter continues to decelerate at 3.2%, wages are running 3.0% year over year, and core PPI came in soft — none of the classic demand-driven inflation channels is accelerating. What is accelerating is the cost of moving physical goods, and that is a function of a closed strait rather than an overheating economy. The ECB confronted the identical problem Thursday and reached the identical conclusion, hiking 25 bps to a 2.50% deposit rate while explicitly noting that euro area core and services inflation both fell. Two central banks are now tightening into a supply shock because neither has a tool that addresses the actual cause.
The market's reaction is the most informative part of the session. A soft core print would normally buy the Fed room, and the 2-year would rally. Instead the 2-year sold off 15 bps and hike odds moved from roughly 60% to nearly 70%. Traders have concluded that this Fed, under Chair Warsh, reacts to headline inflation and inflation expectations rather than to core — a meaningful revision to the assumed reaction function. This morning's August CPI, at 6:30 AM MT, is the last data the committee sees before it decides.
Key Takeaway
The Fed's bias is hawkish and the market has stopped waiting for core to confirm it. Headline PPI at 5.4% with diesel up 24.1% moved hike odds to nearly 70% even as core came in soft. Today's CPI is the last input before the September 16 decision; anything at or above 3.4% headline seals it.
Risk and Positioning
The forecast turned rougher this week. The market's fear gauge, called the VIX, jumped more than 8%, its biggest move in weeks. Gold fell nearly 2% even as the conflict escalated, which tells you investors are worried about interest rates rather than war. The extra interest companies pay to borrow widened only slightly, a sign this is an adjustment and not a panic. Four down days in a row is a trend, though, not noise.
Key Takeaway
This is markets adjusting to higher interest rates, not a panic — but the adjustment isn't over.
This was the fourth consecutive down session and the first one where the volatility complex acknowledged it. VIX rose 8.38% to 17.85, its largest single-session move in weeks, and breadth improved slightly to roughly 60% of issues declining from Wednesday's 70%. The index gave back 0.59% to 7,591.69, leaving it 1.64% below the September 4 close. That is still an orderly decline by any historical measure — but it is now four sessions of consistent direction rather than a single shock, which changes the character from noise to trend.
Valuation is the binding constraint. At roughly 20x forward twelve-month earnings against a ten-year average of 19.0x, the index is priced for a discount rate materially below 4.961% on the 10-year. Q3 blended EPS growth is estimated at 27.4%, down from Q2's realized 50.4% — decelerating earnings growth and a rising discount rate are the two inputs that compress multiples, and both are now moving the wrong way simultaneously. Credit continues to widen modestly from 271 bps on high-yield OAS, still nowhere near a stress signal, which remains the strongest argument that this is a repricing rather than a regime break.
The cleanest confirmation came from gold. Bullion fell 1.93% to 4,317.03 on a session featuring five destroyed tankers, a ballistic missile attack on a Jordanian base, and crude up more than 7%. If gold were trading as a geopolitical fear hedge it would have rallied hard; instead it fell with duration, exactly as the real-rate framework predicts. The dollar's 0.31% gain completes the picture — Wednesday's move had DXY flat, which pointed to term premium; Thursday's had the dollar bid and the curve flattening, which points squarely at policy. Two different trades in two sessions, and the second one is the more dangerous for equity multiples.
Key Takeaway
Implied volatility finally moved, with VIX up 8.38% to 17.85, but it remains low for a market four sessions into a decline with a 70% hike probability and crude above $104. Tail risks are a hot CPI this morning, a 10-year break of 5.00%, and further tanker strikes in the Gulf.
Sector and Cross-Asset Analysis
Defensive corners of the market held up for the first time in this pullback. Phone and media companies gained, and so did everyday goods companies. Tech companies (XLK) and materials each fell more than 1%. Tech is unusually sensitive to interest rates, because its value rests on profits far in the future. Oil and gas companies remain the one group with real wind at their back.
Key Takeaway
Money moved toward steadier companies, which is a sign investors are playing defense.
Leadership turned defensive for the first time in this drawdown. Communication services and consumer staples advanced while technology and materials each fell more than 1%, and the Russell 2000 dropped another 1.02% to 2,891.49. Technology leading the downside is the signal worth marking: through the summer, the AI capex trade absorbed rate increases without complaint because earnings growth outran the discount rate. At a 10-year of 4.961% and Q3 earnings growth decelerating to 27.4%, that arithmetic no longer holds, and the highest-duration equity in the market is now trading like duration.
Cross-asset, Thursday was internally coherent in a way Wednesday was not. Equities fell, the dollar rose 0.31%, gold fell 1.93%, and the curve bear-flattened with 2s10s compressing to 37.5 bps from 40.9 bps. That is the textbook signature of a policy repricing — short rates leading, dollar bid, real assets sold. Wednesday's session had the long end leading with a flat dollar, the signature of a term-premium shock. The distinction is not academic: term-premium shocks can resolve through issuance and positioning, while policy shocks resolve only when the policy path changes. The 30-year at 5.367% added 8.1 bps, less than either shorter tenor, confirming the direction of causality.
The commodity complex is where the escalation is most visible. WTI spot closed at $104.24 against front-month CL1 at $102.48 — a $1.76 spot premium, widened from $0.97 Wednesday and $0.25 on September 4. That premium has grown sevenfold in four sessions, which is the physical market repricing scarcity faster than the futures curve can follow. Equally striking: with Brent at $105.37, the Brent-WTI spread has collapsed to roughly $1.13 against a typical $4 to $6, meaning US crude is no longer enjoying its normal landlocked discount. The dislocation has stopped being a Gulf problem and become a global one. Energy remains the only sector with a fundamental tailwind, but at more than 42% year-to-date on roughly 13x forward earnings with EPS down 10.9% year over year, the multiple is pure scarcity premium — it unwinds violently on any credible transit resolution.
Key Takeaway
Leadership rotated defensive for the first time this cycle: communication services and consumer staples advanced while technology and materials fell more than 1%. Energy remains the supply-shock winner. Defensives outperforming on a rate-driven selloff is a late-cycle tell, not a buying signal.
Economic Data & Events
- 6:30 AM MT — Consumer Price Index (what you pay for groceries, gas and rent) — High Impact
- 6:30 AM MT — Core Consumer Price Index (the same measure, minus food and energy) — High Impact
- 8:00 AM MT — Consumer Sentiment (a survey of how households feel about the economy) — Moderate Impact
- 8:00 AM MT — Inflation Expectations (what households think prices will do next year) — Moderate Impact
This morning brings the report on consumer prices, which measures what you actually pay for groceries, gas and rent. Forecasters expect prices rose 0.4% in August, faster than July's 0.1%. Higher fuel costs are the main reason. A separate survey later this morning shows how worried households are about prices.
Key Takeaway
This morning's inflation report is the last thing the Fed sees before deciding on rates next week.
Today's Calendar
- 6:30 AM MT — Consumer Price Index, August (MoM / YoY) — High Impact
Consensus: +0.4% MoM, +3.4% YoY | Previous: +0.1% MoM, +3.4% YoY
- 6:30 AM MT — Core CPI, August (MoM / YoY) — High Impact
Consensus: +0.4% MoM, +2.4% YoY (Wells Fargo notably lower at +0.23% MoM) | Previous: +0.2% MoM, +2.5% YoY
- 8:00 AM MT — University of Michigan Consumer Sentiment, September preliminary — Moderate Impact
Consensus: Data unavailable | Previous: 51.7 (August final), down 6% MoM and 11% below a year ago
- 8:00 AM MT — UMich Inflation Expectations, September preliminary — Moderate Impact
Consensus: Data unavailable | Previous: 4.0% one-year, 3.3% five-year (steady three months)
Week Ahead
Today's CPI is the only remaining input before the FOMC decides on September 16, and the Fed is in blackout until then. Consumer sentiment at 51.7 and one-year inflation expectations at 4.0% make this morning's revision worth watching. Q3 blended EPS growth is estimated at 27.4%, down from Q2's 50.4%.
The Bottom Line
This morning's inflation report is the one that matters, and it lands before markets open. Expect a bumpy session either way, with steady, dividend-paying companies holding up better than fast growers.
The 10-year at 4.961% sits four basis points from 5.00%, and 2s10s flattened to 37.5 bps from 40.9 — this is a policy trade now, not a term-premium trade. The S&P 500 closed at 7,591.69, a second consecutive close below the 7,686.14 breakout and 1.64% off the September 4 high, leaving 7,500 as the next level that matters. Expect defensives and energy to hold up while rate-sensitive small caps keep lagging. Today's CPI at 6:30 AM MT resolves the September 16 question in a single print.
Disclosure — AI-Assisted Content & Regulatory Notice
This briefing was drafted with the assistance of artificial intelligence tools. All content has been reviewed and approved by Thomas MacPherson, Investment Adviser Representative (Series 65) and Chief Compliance Officer, River Rose Financial, LLC, prior to publication. AI systems may produce errors, omissions, or outdated information; readers should independently verify data.
Market Currents does not constitute an investment advisory relationship, does not create a fiduciary duty, and does not include personalized investment advice. Subscribers should not rely on Market Currents as a substitute for individualized financial advice. This briefing is for informational purposes only. Market conditions change rapidly; all data and projections are subject to revision without notice.
River Rose Financial, LLC is a registered investment adviser with the State of Colorado. Registration does not imply a certain level of skill or training. Past performance is not indicative of future results. All investment strategies involve risk, including possible loss of principal.
