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Briefing.com Summary:
*The August CPI report was good, but not good enough to change the view that the FOMC will raise rates next week.
*Oil prices have retreated amid an FT report that Gulf foreign ministers will meet with Iran Monday in an attempt to help reopen the Strait of Hormuz.
*Oracle is up nearly 8% after its solid earnings report.
The approach to writing this column on this solemn morning commemorating the 25th anniversary of 9/11 includes a pre-CPI view and a post-CPI view. The pre-CPI view was a good one. Equity futures for the major indices were all trading 0.5-0.6% above fair value, the 10-yr note yield was little changed at 4.95%, and oil prices were down 2.8% to $99.60/bbl.
The move in oil prices, a 6% gain in Oracle (ORCL) following its solid earnings report, and a Bloomberg report that Microsoft (MSFT) is aiming to more than triple its data center capacity by 2032 were driving factors for the pre-CPI positive bias.
The post-CPI view is that things are a little more positive.
Total CPI was up 0.4% month-over-month in August, as expected, while core CPI, which excludes food and energy, was up 0.3% (Briefing.com consensus: 0.2%). With these changes, the year-over-year increase in total CPI was 3.4%, as expected, unchanged from July, and core CPI was up 2.4%, down from 2.5% in July.
The key takeaway from the report is that it wasn't good enough to put September rate-hike fears to rest.
Before the CPI report was released, there was a 69.4% probability of a 25-basis-point rate hike next week, according to the CME FedWatch Tool. Following the report, that probability sits at 90.4%.
The 10-yr note yield kissed 4.98% in the wake of the CPI report before pulling back to 4.91%, leaving it three basis points lower than where it stood prior to the CPI report. The important point not to miss, though, is that the 10-yr note yield was already up 17 basis points for the week, so the scope for added fallout was limited unless the CPI report was really bad—which it wasn't.
The CPI report was just okay, and, in our humble opinion, not enough to convince the FOMC to hold off on a 25-basis-point rate hike on September 16.
Arguably, the market has already been absorbing the likelihood of a rate hike. The 2-yr note yield is up 24 basis points this month already, and major equity indices have seen some added selling pressure.
Some of that pressure should be relieved at today's open in a bit of a relief trade driven by lower oil prices and a knowingness that the CPI report could have been worse. That doesn't mean it was good. It just means it was good enough for a market that had been on the defensive ahead of its release, mindful that it is a report that needed to lean more toward "great" to relieve the pressure of an anticipated rate hike that has been building.
Currently, the S&P 500 futures are up 74 points and are trading 0.9% above fair value, the Nasdaq 100 futures are up 330 points and are trading 1.1% above fair value, and the Dow Jones Industrial Average futures are up 521 points and are trading 0.9% above fair value.
