Fed rate-hike bets climb after wholesale prices jump most since 2022

Wholesale prices in the United States posted their biggest monthly increase in more than four years in September, sharpening Federal Reserve rate-hike bets. The producer price index for final demand rose a seasonally adjusted 1.3 percent from August, the steepest gain since a 1.7 percent jump in March 2022 and more than double the 0.6 percent rise economists had expected, according to the Bureau of Labor Statistics.

Over the past 12 months, wholesale prices are up 6.3 percent on an unadjusted basis, the largest annual increase since December 2022. The Bureau of Labor Statistics released the report, labeled USDL 26-1576, on Thursday at 8:30 a.m. Eastern time.

The increase was broad and led by energy. Prices for final demand goods climbed 2.6 percent in September, the largest monthly gain since the government began tracking that series in December 2009. Energy accounted for more than 80 percent of that rise, with its sub-index up 10.8 percent. Gasoline prices surged 20.3 percent and made up about half of the increase in goods prices; diesel, jet fuel, and crude oil prices also rose. Food prices rose 1.2 percent, while goods excluding food and energy moved up 0.3 percent.

Services were not spared either. The index for final demand services rose 0.8 percent, its biggest increase since April, driven by a 1.4 percent rise in trade margins and a 3.4 percent jump in transportation and warehousing. Even stripping out food, energy, and trade services, prices rose 0.5 percent in September and are up 5.0 percent from a year earlier, a sign the pressure runs deeper than fuel.

Why it matters for the Fed's rate-hike calculus

The hot wholesale report landed one day after September consumer prices came in hotter than expected, with inflation at 3.7 percent year over year and core inflation at 2.6 percent, according to the Bureau of Labor Statistics. Two sharp inflation readings in a row have revived Wall Street's rate-hike expectations and pushed the Federal Reserve's next move back to the top of the agenda.

Chair Kevin Warsh has said one of his key tests for pausing rate increases is confidence that inflation will return to the Fed's 2 percent target on time. The September numbers point the other way. Kathy Bostjancic, chief economist at Nationwide, wrote that she sees real risks the Fed will deliver another rate-hike at its October 27-28 meeting, even though recent comments from officials had cooled expectations for back-to-back hikes. Alex Pelle, senior U.S. economist at Mizuho Securities, said the picture was not benign, with inflation elevated and intensifying, and added that there was little reason for the Fed to hesitate to keep moving rates higher.

Futures markets now put the odds of a quarter-point rate-hike at the end of October at 29 percent, according to CME FedWatch, with an 88 percent probability of at least one quarter-point increase by December. The rate-hike pricing reflects a second consecutive hot inflation report. Other data Thursday showed September retail sales up 0.8 percent, doubling forecasts, while weekly jobless claims came in below expectations, evidence the economy is still running warm enough for the Fed to keep tightening. For younger investors watching the cycle, a recent survey showed a deep generational split in how investors are positioning.

Markets rotate as tech wobbles

Investors rotated out of technology shares and into defensive sectors on Thursday as rate-hike odds climbed. The Dow Jones Industrial Average gained 550 points, or 1.1 percent, led by Nike, Salesforce, and Home Depot, while the S&P 500 rose 0.3 percent and the tech-heavy Nasdaq erased steep losses to close up 0.1 percent.

The rebound came after Wednesday's sell-off, when the Nasdaq and S&P 500 registered their worst day since July, falling 1.9 percent and 1.1 percent respectively after the hot consumer price report. Tech stocks have tumbled on concerns about the debt companies have taken on to fund the artificial intelligence buildout, a strain already visible in Wall Street's pricing of a CoreWeave default.

Goldman Sachs estimates the five major AI hyperscalers will lift combined capital spending to about one point two trillion dollars next year, a figure drawing sharper scrutiny now that rate-hike expectations are pushing borrowing costs higher. The Philadelphia semiconductor index has slumped 8 percent this month, though it remains up more than 60 percent on the year against a 13 percent gain for the S&P 500.

Attention now turns to earnings season, which analysts expect to deliver more than 30 percent profit growth for S&P 500 companies in the third quarter, according to LSEG IBES. Meta opens the hyperscaler reporting season next week after launching its Muse AI assistant, while Lam Research and Texas Instruments report on Wednesday. Tesla, Netflix, Procter & Gamble, and GE Aerospace are also on the calendar. Kevin Shea, senior equity analyst at BNY Wealth, said the key question for earnings season is whether hyperscaler profitability can grow faster than the pace of their capital spending while rate-hike bets keep the cost of capital rising.

Sources: the Bureau of Labor Statistics September PPI release, ABA Banking Journal, and economists' rate-hike analysis at London Insider.