Wall Street Wrote Off the Rate Hike. It's Still 42%.
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CPI Countdown
The Economy Lost Jobs. Stocks Set a Record. Wednesday Breaks the Tie.
Payrolls went negative for the first time this cycle. The S&P closed at an all-time high the same week. One inflation print settles the argument.
It’s Monday. CPI lands Wednesday at 8:30 a.m. Here’s what each outcome does to your portfolio before the print.
Key Idea
Friday’s job losses did not kill the September rate hike. Only inflation can do that. And the number that decides it drops Wednesday morning, not in Friday’s payrolls.
The Jobs Report
The economy lost 23,000 jobs in July. Wall Street expected a gain near 85,000. That’s a miss of six figures. Government drove the drop, shedding 53,000 jobs. Private employers actually added 30,000.
The unemployment rate fell to 4.1%. Sounds good. It isn’t. The rate dropped because people stopped looking for work. Leave the labor force, and you’re no longer counted as unemployed. Nearly 1.4 million Americans have left the workforce this year.
Then came the revisions. The government erased 103,000 jobs from May and June. Numbers you trusted two months ago just vanished.
So why did your brokerage app flash green on Friday?
A weak labor market means less pressure on the Fed to raise rates. Bad news became good news. You’ve seen this movie before.
The unemployment rate fell to 4.1%. Sounds good. It isn’t. The rate dropped because people stopped looking for work. Leave the labor force, and you’re no longer counted as unemployed. Nearly 1.4 million Americans have left the workforce this year.
Then came the revisions. The government erased 103,000 jobs from May and June. Numbers you trusted two months ago just vanished.
So why did your brokerage app flash green on Friday?
A weak labor market means less pressure on the Fed to raise rates. Bad news became good news. You’ve seen this movie before.
Why Wednesday Matters
Here’s where it gets interesting. The Fed held rates on July 29. But the vote was 9 to 3. Three officials wanted a hike right then.
Those dissenters are Beth Hammack, Neel Kashkari, and Lorie Logan. That’s the most divided the Fed has been since 2016. And they don’t care about Friday’s job losses. They care about one thing: inflation.
Kevin Warsh chairs this Fed now. He’s signaled he’ll raise rates in September if inflation stays hot. So the hike was never about payrolls. It’s about the price of your groceries.
That number drops Wednesday.
Read that again. The market spent Friday celebrating a report the Fed’s hawks will barely glance at. Consensus says core inflation rose 0.2% in July. Core strips out food and energy. It’s the reading the Fed actually targets. And 0.2% is up from zero the month before. A re-acceleration. Enough to keep three hawks talking.
Markets now price a 42% chance of a September hike. Down from 55% before Friday. Down, not gone. A coin flip is not “off the table.”
Those dissenters are Beth Hammack, Neel Kashkari, and Lorie Logan. That’s the most divided the Fed has been since 2016. And they don’t care about Friday’s job losses. They care about one thing: inflation.
Kevin Warsh chairs this Fed now. He’s signaled he’ll raise rates in September if inflation stays hot. So the hike was never about payrolls. It’s about the price of your groceries.
That number drops Wednesday.
Read that again. The market spent Friday celebrating a report the Fed’s hawks will barely glance at. Consensus says core inflation rose 0.2% in July. Core strips out food and energy. It’s the reading the Fed actually targets. And 0.2% is up from zero the month before. A re-acceleration. Enough to keep three hawks talking.
Markets now price a 42% chance of a September hike. Down from 55% before Friday. Down, not gone. A coin flip is not “off the table.”
The Other Record
While you watched stocks set records, the bond market sent a different message. The 30-year Treasury yield sits above 5.2%. That’s the interest the government pays to borrow for 30 years. It’s the highest since 2007.
Think about what that means at your kitchen table. Your 401(k) hit an all-time high Friday. Your mortgage quote is the worst since before the last financial crisis. Same week. Same economy.
Both numbers answer one question. Does inflation cool, or not?
The stock market bet yes. The bond market isn’t convinced. One of them is wrong. Wednesday starts to tell you which.
Think about what that means at your kitchen table. Your 401(k) hit an all-time high Friday. Your mortgage quote is the worst since before the last financial crisis. Same week. Same economy.
Both numbers answer one question. Does inflation cool, or not?
The stock market bet yes. The bond market isn’t convinced. One of them is wrong. Wednesday starts to tell you which.
The Overlooked Signal
The rally read a weak jobs report as the all-clear for the Fed. But the Fed’s three hawks vote on inflation, not employment. Friday’s payrolls don’t touch their math. Wednesday’s CPI does. The crowd may have celebrated the wrong number.
Three Ways Wednesday Breaks
Base
Core CPI prints 0.2%, right on consensus. Hike odds hold near 40%. The market grinds sideways and the S&P defends 7,700. Own quality that survives either outcome: Nvidia (NVDA), the AI chip leader, and Microsoft (MSFT), the cloud giant. No melt-up, no break. You wait for Thursday’s PPI to confirm.
Upside
Core comes in at 0.1% or softer. Hike odds collapse toward 25%. Yields fall and the melt-up resumes. Fundstrat’s 8,000 S&P target gets legs. Chips and small caps lead: the semiconductor ETF (SOXX) and the Russell 2000 (IWM). SpaceX (SPCX), Musk’s rocket company, builds on last week’s 19% run.
Risk
Core prints 0.3% or hotter. The September hike roars back above 60%. Yields spike and the 30-year pushes toward 5.4%. High-multiple tech gives back first. Expect a 2 to 3% S&P pullback Wednesday and Thursday. Then 4 to 5% over the following week if Thursday’s PPI confirms. The market has shrugged off hot prints before. It has never done it with three Fed hawks campaigning openly and the chair backing them. Trim the richest names. Hide in the energy ETF (XLE) and short-duration bonds.
Our View
We told you in July the dot plot was dead and the data would run this Fed. Friday proved it. The payrolls miss settled nothing. It only set up Wednesday.
So here’s the instruction. Don’t position for the jobs report. It already happened. Position for the CPI. If you’re overweight high-multiple tech, Wednesday is the day to know your hedge, not the day to go find one.
The economy and the market disagreed this week. Disagreements get settled. This one gets settled at 8:30 Wednesday morning, before your coffee is cool. The tie breaks then. Be ready before it does.
So here’s the instruction. Don’t position for the jobs report. It already happened. Position for the CPI. If you’re overweight high-multiple tech, Wednesday is the day to know your hedge, not the day to go find one.
The economy and the market disagreed this week. Disagreements get settled. This one gets settled at 8:30 Wednesday morning, before your coffee is cool. The tie breaks then. Be ready before it does.