The Top Line
Prices are rising again, led by gasoline, and long-term interest rates just hit their highest level since 2007. The big question today is how much further the Fed plans to raise rates.
We are operating in a Late-Cycle regime characterized by a central bank preparing to tighten into an energy supply shock. August CPI rose 0.4% MoM and 3.4% YoY with gasoline up 27.4% YoY, and the 10Y closed at 5.006%, its highest since 2007, with a 25 bp hike roughly 90% priced for today. The structural theme has flipped from AI capex to AI restraint, and leadership is cracking.
Inflation
Your grocery bill is fairly steady, but your gas bill isn't. Prices rose 3.4% over the past year, and gasoline is up more than 27%. That matters to the Fed, the central bank that helps set interest rates on things like mortgages and car loans. With energy pushing prices higher, the Fed is widely expected to raise rates today for the first time in three years.
Key Takeaway
Borrowing for homes, cars and credit cards is likely to get a bit more expensive after today's expected rate increase.
August CPI rose 0.4% MoM and 3.4% YoY, matching consensus. Core CPI rose 0.3% MoM, up from 0.2% in July, and 2.4% YoY, down from 2.5%. What matters more than the in-line headline is what drove it. Gasoline rose 3.9% on the month and made up more than a third of the all-items increase, and the energy index is up 16.3% YoY. PCE last read 3.7% on a 12-month basis, and its 4.1% six-month annualized pace is moving the wrong way.
The pressure is concentrated in energy, not in domestic services. Shelter slowed to 3.0% YoY from 3.2% in July, services ex-energy is running at 3.0%, and food is contained at 2.7%. That is the case for a patient Fed. The case against patience is pass-through: the September Empire State survey (7.6) showed input and selling-price increases both accelerating, and August payrolls of +162K with 0.3% wage growth mean labor is not yet cooling inflation. July import prices fell 0.4%, but that reading predates crude's move from roughly $92 to $106.
The market has already priced the outcome. FedWatch hike odds jumped to 85% after CPI from 71% the day before, and stood at roughly 88%–93% going into the meeting. Supply is making it worse. The Houthi strike that shut Saudi Arabia's East-West pipeline for weeks takes out the main Hormuz bypass, which was the workaround the curve had started to price. WTI closed at $105.80, up 3.62%.
Key Takeaway
The Fed enters today with a hawkish bias and a roughly 90% priced 25 bp hike to 3.75%-4.00%, its first since July 2023. Financial conditions have already tightened through a 5% 10Y and a firmer dollar. The swing factor is the dot plot: futures price two hikes by year-end versus one in June.
Risk and Positioning
Think of today's forecast as cloudy with a chance of storms. The market's fear gauge (the VIX) has climbed about 18% since early September, though it remains at moderate levels. Stocks slipped for a second straight day as investors moved money toward safety ahead of the Fed. Still, the extra interest companies pay to borrow hasn't budged, a sign that lenders aren't worried about businesses.
Key Takeaway
Markets are uneasy but not panicking, and your long-term plan doesn't need to change because of one rate decision.
Sentiment is risk-off but orderly. The S&P 500 fell 0.45% to 7,585.74, its second straight loss. It is now 1.7% below the September 4 close of 7,718.61 and below 7,686.14, the level we set as the line that would end the Bull call. VIX rose 0.47% to 17.19, up from 14.52 on September 4. That is an 18% rise in implied vol over seven sessions, but still only a mid-teens reading for a market facing its first hike in three years and a new supply shock.
Credit does not agree with the rest of the tape. ICE BofA high-yield OAS was 265 bps on September 11, unchanged from September 3, even as the 10Y rose about 22 bps and CPI confirmed the hike. Spreads this tight are pricing a rate shock, not a growth scare, and cross-asset moves agree. Stocks, Treasuries and gold (-0.13% to $4,293.89) all fell. Only the dollar (DXY 99.611, +0.15%) and crude rose. A forward P/E near 20x, last checked in early September, leaves little room if the discount rate stays at 5%.
Investors are rotating, not dumping stocks. On Monday the equal-weight S&P rose while the cap-weighted index fell. AI infrastructure names sold off after Anthropic's CEO published an essay urging a slower pace of AI capability development, and OpenAI's CEO agreed with him. Marvell, Micron and Super Micro fell about 6%, and Nvidia and Broadcom about 3%. The worry is slower model training, not lower spending: no hyperscaler has announced a capex cut.
Key Takeaway
Implied vol at 17.19 still looks light for a binary FOMC stacked on an oil shock: VIX is up 18% since Sept 4 while HY spreads sit flat at 265 bps. Tail risks: dots showing 2+ more hikes, a sustained 10Y above 5%, and a longer Saudi pipeline outage pushing WTI toward $110.
Sector and Cross-Asset Analysis
Tech companies (XLK) led Monday's decline, pressured by AI leaders calling for slower development. Companies that build data centers and power equipment fell hardest, some dropping 7% to 9%. Oil and gas companies (XLE) held up as crude jumped above $105 after a Saudi pipeline was damaged. Healthcare and pharmaceutical companies (XLV) gained, a sign investors want steadier businesses right now.
Key Takeaway
This is a reshuffle within the market, not a rush for the exits, which is why staying diversified matters.
Leadership is changing. In Monday's session, technology (XLK, -1.67%) and industrials (XLI, -1.44%) led eight of eleven sectors lower, while communication services (XLC, +2.79%) and health care (XLV, +1.35%) rose. The AI selloff hit infrastructure hardest: GE Vernova fell about 9%, Vertiv about 7%, and CoreWeave, SanDisk, Intel and AMD each lost 4% or more. Yet Vertiv's $15.0B backlog, up 109%, reflects capex commitments with 12–18 month lead times that a change in messaging does not undo. Energy (XLE), up 42% YTD as of early September, remains stretched relative to industrials.
The Treasury curve tells the policy story. The 2Y closed at 4.671% (+0.3 bps) and the 10Y at 5.006% (+0.8 bps). That puts 2s10s at 33.5 bps, down from 41.0 bps on September 4. Since then the 2Y is up about 30 bps and the 10Y about 22 bps, the classic bear flattening of a market pricing a hiking cycle. The long end is also under pressure, with the 30Y near 5.35% on Monday. The global bond rout, with Bunds at 2011 highs and the JGB 10Y above 3%, removes the foreign demand that usually caps US yields.
Crude is the main cross-asset driver. WTI spot closed at $105.804 (+3.62%) and front-month CL1! at $105.83 (+4.38%), so futures now sit $0.03 above spot. On September 4, spot was $0.25 above futures. The spot premium we have tracked as the scarcity signal is gone, but scarcity did not ease. Both prices rose about 15% in seven sessions, and futures caught up to spot as the October contract nears expiry. Gold is still trading on real rates: it is down 3.1% since September 4 as hike odds rose.
Key Takeaway
Leadership has rotated out of AI infrastructure toward communication services, health care and energy, with equal-weight beating cap-weight. Tech and industrials are out of favor on AI-restraint fears and a 5% discount rate. This reads as de-risking from crowded growth, not broad liquidation, which fits flat credit spreads.
Economic Data & Events
- 6:30 AM MT — Retail Sales (how much shoppers spent in stores and online in August) — High Impact
- 6:30 AM MT — Import Prices (what the U.S. pays for goods bought from other countries) — Moderate Impact
- 8:00 AM MT — NAHB Housing Market Index (how confident home builders feel) — Low Impact
- 12:00 PM MT — Fed Rate Decision and Economic Projections (the Fed's interest rate move and its outlook) — High Impact
- 12:30 PM MT — Fed Chair Warsh Press Conference (the Fed chair explains the decision) — High Impact
Today's retail sales report shows whether shoppers kept spending in August after pulling back in July. A second weak month would suggest households are feeling the squeeze from higher gas prices. Then the Fed announces its decision at midday. Its outlook for future rate increases may move markets more than today's decision itself.
Key Takeaway
The Fed's 12:00 PM MT decision, and its hints about future rate increases, is the most important event this week.
Today's Calendar
- 6:30 AM MT — Retail Sales (Aug) — High Impact
Consensus: Not confirmed | Previous: -0.6%
- 6:30 AM MT — Import Prices (Aug) — Moderate Impact
Consensus: Unavailable | Previous: -0.4%
- 8:00 AM MT — NAHB Housing Market Index (Sep) — Low Impact
Consensus: Unavailable | Previous: 35
- 12:00 PM MT — FOMC Rate Decision & Summary of Economic Projections — High Impact
Consensus: +25 bp to 3.75%–4.00% | Previous: 3.50%–3.75%
- 12:30 PM MT — Fed Chair Warsh Press Conference — High Impact
Consensus: N/A | Previous: N/A
Week Ahead
Thursday brings jobless claims, the Philly Fed survey and August housing starts; Friday has industrial production and a Bowman speech. Q3 earnings season does not start until mid-October, so macro owns the tape. The Sept 24 Trump-Xi summit is the next catalyst after the Fed.
The Bottom Line
Expect choppy markets around the Fed's midday announcement today. What the Fed signals about future rate increases will matter more than today's move itself.
The 10Y at 5.006% governs today: holding above 5% after the statement extends the bear flattening, while a slip under 4.95% on measured dots would relieve multiples. The S&P 500 sits 1.3% below its 7,686 breakout; Monday's 7,620 close is first resistance and 7,500 is psychological support. Retail sales at 6:30 AM MT sets the tone into the 12:00 PM MT decision; energy should keep leading while AI infrastructure funds the rotation.
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.
