Last week the Fed hiked rates for the first time since 2023. This week, Fed officials made it clear they’re not done. Three regional presidents delivered hawkish remarks in the same week, the 10-year Treasury yield hit its highest level since 2007, and oil finally showed signs of pulling back.
The Fed Is Not Done
The post-meeting Fed speak this week removed any ambiguity about the committee’s direction. New York Fed President John Williams said it would be “reasonable” to expect another rate hike by year-end. Philadelphia’s Anna Paulson said, “a moderate tightening of policy may be necessary.” Boston’s Susan Collins warned of “an increased likelihood” that inflation will stay “notably” above 2%.
The CME FedWatch tool now puts the probability of an October hike at 77.5%, up from 53% earlier in the week. I have my doubts due to the timing of the mid-term elections as the Fed historically remains neutral at this meeting.
The 10-Year Pushes Past 5.20%
The 10-year Treasury yield rose to 5.23% this week, its highest level since mid-2007. Two weeks ago I wrote that the next leg higher should carry yields to the mid-5% area. We are getting there faster than I expected as you can see in the chart below. For now, I am not seeing signs of resistance so this march higher will likely continue into October.
Term premium is rising across the curve and there is no obvious catalyst to reverse it in the near term. Also, corporate credit spreads have held relatively well despite rising rates as you can see below.
Oil Shows Signs Of Relief
Crude oil remained below $100 this week after hitting $102 on the 15th. In the chart below, you can see that momentum is trying to flip to the downside as evidenced by the MACD momentum indicator at the bottom of this chat. A break below $87 next week would likely bring in more sellers and provide some added relief to the inflation picture.
The Economy Is Not Slowing Down
This week’s data made it clear that higher rates have not dented growth. The S&P Global flash PMI composite index surged to 58.4 in September from 56.0 in August — the strongest expansion since July 2021. Manufacturing jumped to 57.0, well above the 53.6 consensus and the highest reading since May 2022. Services rose to 58.7, a five-year high. Employment grew at the fastest pace since June 2022.
The inflation signal within the PMI is the one to watch. Input costs rose at the steepest rate in nearly four years, driven by supply chain delays and capacity constraints. That is the opposite of what the Fed needs to see.
The durable goods report on Friday told a similar story. Headline orders were flat at $338.6 billion, dragged down by a 0.6% drop in transportation equipment. But core capital goods orders — nondefense excluding aircraft — rose 1.6%. Unfilled orders have now increased in 25 of the last 26 months, reaching $1.6 trillion. Inventories rose for the eleventh consecutive month.
Businesses are still investing, backlogs are growing, and demand has not cracked. That’s good for the economy and one reason the stock market has held up despite the oil shock this year.
Looking Ahead
Next week brings Micron’s earnings on September 30th. This is the most important report for the AI trade heading into Q4. Wall Street expects roughly $50 billion in revenue — a 350% increase year-over-year. The question is whether Q1 guidance validates the structural demand thesis or signals a cyclical peak. If Micron delivers, it reinforces the case that mega-cap tech and semiconductors can continue to offset the drag from higher rates on the broader market.
Stocks are caught between strong earnings and rising rates. That tension will define the market into year-end.
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President, Kisco Capital
This commentary is provided by Kisco Capital LLC for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Opinions are subject to change without notice. Past performance is not indicative of future results. All investments involve risk, including possible loss of principal. Kisco Capital and its clients may hold positions in securities discussed herein.
