The Top Line
The cost of shipping and making things is rising faster than the prices you see in stores. The Federal Reserve raises interest rates tomorrow, even though it cannot do much about the cause.
We are operating in a late-cycle regime characterized by an energy supply shock that is now moving through the production pipeline faster than monetary policy can respond. August producer prices rose 5.4% year over year against consumer prices at 3.4%, a two-point gap that resolves through either margin compression or consumer pass-through. Saudi seaborne crude exports have fallen to 3.2 million barrels a day, the lowest in thirteen years. The structural question added Monday is whether the AI capex cycle underwriting this market slows by choice.
Inflation
There are two inflation numbers worth knowing. Consumer prices, what you pay, rose 3.4% over the past year. Producer prices, what companies pay for fuel and materials, rose 5.4%. The gap is diesel, which jumped 24% in a single month because of the fighting in the Middle East. Companies are eating that cost for now, but it usually reaches store shelves within a year.
Key Takeaway
Companies are absorbing higher fuel costs today, which means prices you pay may keep drifting up next year.
The August producer price report, released September 10 and largely overshadowed by Friday's CPI, is the more important of the two. Final demand PPI rose 0.4% on the month and 5.4% year over year; core final demand excluding food, energy and trade services rose 0.3% monthly and 4.7% annually. Set that against core CPI at 2.4% and headline CPI at 3.4%. Producer inflation is running roughly two points above consumer inflation, which means firms are currently absorbing input costs rather than passing them on.
The mechanism is diesel. Final demand energy rose 4.2% on the month, with diesel fuel alone up 24.1% and accounting for roughly a third of the entire goods increase; transportation and warehousing services rose 2.3%. Diesel is the input price that touches every physical good in the economy, and it does not show up in consumer prices for two to three quarters. More than three-quarters of the broad-based PPI rise traces to energy, which makes this a cost shock working its way up the chain rather than demand-driven inflation.
That gap has exactly two exits, and neither is good for equities at current multiples. Either margins compress as firms eat the input cost, which is an earnings problem, or the cost passes through to consumers over the next several quarters, which reopens the headline inflation problem the Fed believed it was closing. The rate decision Wednesday addresses neither. A 25 basis point move to 3.75%-4.00% is roughly 85% priced, and the Fed is hiking because its credibility requires a response to 3.4% headline inflation, not because 3.75% funds will restore Saudi export capacity.
Key Takeaway
The Fed will hike Wednesday into an energy shock it cannot reach, and core producer inflation at 4.7% gives it the cover to do so. Financial conditions are already tight with the 10-year at 5%. Watch the statement's brevity: Warsh publishes no forward guidance and submits no dot, so the press conference carries the entire signal.
Risk and Positioning
The market's fear gauge, called the VIX, rose 8% on Monday. It has bounced up and down three days running without going anywhere, which is what markets do while waiting on a big decision. Companies can still borrow cheaply, a sign investors are not expecting a recession. Stocks fell modestly across the board. Think of it as an overcast day, not a storm.
Key Takeaway
Markets are restless but not frightened, and they are waiting on the Fed before committing either way.
Risk appetite deteriorated modestly and selectively. The S&P 500 fell 0.48% to 7,619.97, the Nasdaq 0.56% and the Dow 0.29%, while the VIX rose 7.95% to 17.11. That level deserves context: the fear gauge has traveled 17.85 to 15.85 and back to 17.11 in three sessions without the index moving more than 1% in either direction. That is churn around an event, not a repricing of risk.
Credit continues to dissent. ICE BofA high-yield option-adjusted spreads stood at 270 basis points at the last published reading on September 10, five basis points wider than September 3 and still deep in historically tight territory. Two weeks of a bond rout, a 10-year through 5% and an active regional war have produced five basis points of credit widening. Either credit is complacent or the equity drawdown is a discount-rate adjustment rather than a growth scare — the second reading is more consistent with the evidence, since the forward multiple near 20x is precisely what a 5% risk-free rate attacks.
The genuine risk sits in dispersion rather than direction. Monday delivered a 14-percentage-point spread inside the technology sector on a 0.48% index day: the VanEck Semiconductor ETF fell 4%, Teradyne dropped 9.3% and Coherent 8.68%, while CrowdStrike gained 10.45% and Palo Alto Networks 8.97%. Gold fell 1.15% to $4,299.52, its third consecutive decline into rising yields, confirming that the metal is trading as a real-rate instrument and is not hedging geopolitical risk in this cycle. Anyone holding gold as war insurance has now been wrong three sessions running.
Key Takeaway
The VIX at 17.11 has round-tripped from 17.85 to 15.85 and back in three sessions, which is churn rather than repricing. Credit at 270 bps still refuses to widen. The real risk is dispersion: a 14-point spread between semiconductors and cybersecurity inside a 0.48% index decline leaves concentrated positions exposed.
Sector and Cross-Asset Analysis
The action was inside the tech sector rather than across it. Chipmakers fell hard after a leading AI executive called for slowing the pace of AI development. Cybersecurity firms rose sharply as investors moved money into software with steadier revenue. Oil and gas companies gained again as crude passed $102 a barrel. Gold fell for a third day, which is a reminder that it does not always rise during conflict.
Key Takeaway
Money is moving from AI hardware into software, and energy keeps winning as oil stays above $100.
Monday's rotation happened inside technology, not out of it. Semiconductors were the session's casualty — SMH fell 4%, Teradyne 9.3%, Coherent 8.68% — after Anthropic's chief executive publicly called for slowing frontier AI model development over the weekend, a headline that goes directly at the capex assumption underpinning the compute complex. President Trump dismissed the concern. Cybersecurity absorbed the rotated capital: CrowdStrike +10.45%, Palo Alto Networks +8.97%. Both trades express the same view, that software with recurring revenue is safer than hardware levered to a single capital cycle.
Breadth was mildly defensive rather than broken. The Russell 2000 fell only 0.25% against the Nasdaq's 0.56%, the first session in weeks where small caps outperformed large. That is not a rotation into small caps; it is the absence of mega-cap technology bid. With all four indices down modestly and no sector collapsing, this reads as pre-FOMC de-risking rather than distribution.
Cross-asset, the supply shock strengthened and the dollar finally responded. WTI rose 1.71% to $102.11 spot and 1.34% to $101.39 front-month, with Brent up 2.56% to $107.30. The spot-to-front-month premium doubled to $0.72 from $0.34 Friday — the clearest physical-scarcity signal since the Hormuz closure began, and a direct reversal of the compression thread we had been tracking toward a workaround. The reason is concrete: Oman postponed the Iran-Gulf shipping talks with no new date after Saudi Arabia rejected Iran's draft, Houthi forces struck King Khalid Air Base, and the East-West pipeline that moves roughly 5 million barrels a day needs up to six weeks of repair. The dollar index rose 0.38% to 99.466, rallying with yields for the first time in a week.
Key Takeaway
Leadership rotated within technology rather than out of it — compute hardware sold off while security software surged. Energy and the dollar led on the day, gold fell for a third session against rising yields, and the crude spot premium doubled. Capital is positioning for a longer supply disruption.
Economic Data & Events
- 6:30 AM MT — Empire State Manufacturing Index (a survey of New York factory activity) — Moderate Impact
- 11:00 AM MT — 20-Year Bond Auction (the government borrowing $18 billion for 20 years) — High Impact
- 12:00 PM MT — Fed Meeting Begins (day one of two, no announcement today) — Low Impact
Two reports today matter modestly, but tomorrow is the main event. The manufacturing survey will show whether factory activity is cooling. The government auction tells us how willing investors are to lend at today's higher rates. The Fed begins its two-day meeting this afternoon with no announcement. The decision comes tomorrow at noon Mountain time.
Key Takeaway
Tomorrow's Fed decision at noon Mountain time is the only event this week likely to move your portfolio.
Today's Calendar
- 6:30 AM MT — Empire State Manufacturing Index (September) — Moderate Impact
Consensus: 14.10 | Previous: 20.60
- 11:00 AM MT — 20-Year Bond Auction ($18B) — High Impact
Consensus: N/A | Previous: prior 20-year auction results not published by calendar sources
- 12:00 PM MT — FOMC Meeting Convenes (Day 1) — Low Impact
No announcement today; decision Wednesday at 12:00 PM MT
Week Ahead
Everything defers to Wednesday's decision at 12:00 PM MT, where a 25 bp hike to 3.75%-4.00% is roughly 85% priced and August retail sales land the same morning. Thursday brings jobless claims, housing starts and the Philadelphia Fed survey; Friday closes with industrial production.
The Bottom Line
Markets are treading water until the Fed speaks tomorrow. Borrowing costs are at three-year highs and oil keeps climbing, so expect more choppy days before things settle.
The 10-year touched 5.00% intraday and closed at 4.998%, its highest since October 2023, with the 30-year at 5.354%. The S&P has now lost both the 7,686.14 breakout and the 7,630 support that defined the August range; 7,591.68, the September 10 low close, is the level that decides whether this is a pullback or a trend. Today's tactical event is the 11:00 AM MT $18B 20-year auction — a weak bid with the curve at these levels pressures equities into the Fed decision.
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.
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