Fed 100 bps

That was the reaction to the hotter-than-expected US CPI data yesterday, with markets rushing to consider odds of a 100 bps rate hike by the Fed next week. Personally, I think that is a bit of an overreach in spite of everything else that is going on i.e. US economy holding up better than most estimates as well. This looks more like a heat of the moment reaction and a bit of a squeeze on pricing ahead of the Fed next week, if anything else.

For some context, Fed fund futures did not even consider a 100 bps rate hike last week but odds of that now stand at ~36% at the moment (it was a coin flip at one point yesterday).

Nonetheless, the dollar ran hot and equities were trounced with the S&P 500 falling over 4% and the Nasdaq slumping by over 5% in trading yesterday. The greenback sits in a good spot as it starts to run up against key technical levels again while the S&P 500 may be headed towards a test of its 6 September low at 3,886.75 next.

Those will be key considerations ahead of the Fed next week as traders will look to sort out their feet in preparing for any likelihood of a 100 bps rate hike. I don't doubt that more sticky inflation will mean that the Fed's resolve is stronger but in the immediate picture, I still have reservations about Powell & co. pushing the limits on more aggressive rate hikes.

That will still mean a 75 bps rate hike next week but in the big picture view, a terminal rate of somewhere around 4% is almost certain with the Fed possibly doing more now to try and rein in inflation.