September Fed hike odds fall as CPI and PPI cool

Financial markets have spent much of August preparing for a potential interest-rate increase by the Federal Reserve, under the leadership of Kevin Warsh. But as of this week, that prospect increasingly looks like a trade from another world. The odds of a September rate hike have fallen to about 25% on Polymarket, from around 60% earlier this month. But the bigger story is not simply that investors expect an easier Fed.

The market is separating the short-term monetary-policy outlook from the structural forces keeping long-term bond yields high. The Warsh Rate-Hike Trade Is Unraveling The latest Consumer Price Index (CPI) and Producer Price Index (PPI) inflation data weakened the case for an immediate rate hike. 2%, both landing in line with estimates. 1%, both below expectations.

Combined with last Friday’s weak July payrolls numbers, that has driven a sharp dial-back in tightening expectations. Pantheon Macroeconomics said the data make a September hike increasingly difficult to justify. “Given recent data, Mr. S.

economist Samuel Tombs said in a note. Pantheon expects the Fed to keep the policy rate unchanged for the remainder of the year, as core inflation remains flat. But Long-Term Yields Have a Different Problem This is where the market story gets more complicated. The collapse in September hike expectations should normally be bullish for Treasury bonds.

Yet the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT ) remains near its lowest levels in years. Chart: Despite Reducing Fed Hike Risk, Long-Term Bond ETF Trades Near +20-Year Lows The reason is that long-term yields are not controlled exclusively by the Fed. Yardeni says higher yields also reflect strong AI-related demand for capital, demographic pressures on national saving, economic resilience and increased borrowing by hyperscalers to fund AI investments. 00% as broadly consistent with these fundamentals," Yardeni said.

In other words, a September Fed hold could help Treasury bonds without necessarily triggering a massive bond rally. "The Bond Vigilantes are not revolting yet," Yardeni said. Why Stocks Are Getting the Better Deal Equities face a much simpler setup. If the Fed does not hike in September, investors can remove one of the biggest near-term threats to risk assets.

At the same time, the economy remains resilient. Yardeni notes that the Weekly Economic Index was consistent with roughly 3% real GDP growth, while the Atlanta Fed’s GDPNow model was pointing to strong third-quarter growth. That combination — less Fed tightening with a strong economy — is exactly what stocks want. The SPDR S&P 500 ETF Trust (NYSE: SPY ) closed at a record high on Thursday, while the iShares Russell 2000 ETF (NYSE: IWM ) also reached a new peak.

The SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA ) and Invesco QQQ Trust (NASDAQ: QQQ ) are also trading just shy of their all-time highs. For investors, the message is becoming clearer: the September hike trade is collapsing, but the high-rate world is not. Read Also: The ‘Right Tail’ for Stocks Just Got Better: Here’s the Number Behind It Image: Shutterstock