CPI meets
the big banks

Last week the Federal Reserve told markets plainly where it is leaning. The minutes of the Sept. 15–16 meeting, released Wednesday, said “most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end.” Almost all participants judged that inflation risks “were tilted to the upside” while risks to the labor market “had diminished and were now broadly balanced.” On Thursday Governor Christopher Waller went further: “For at least the near term, policy will be focused on the inflation side of our mandate.”

Markets took that calmly. The S&P 500 rose 1.15% for the week to 7,811.54, and Treasury yields slipped — the 10-year closed Friday at 5.24%, down from 5.28%, after hitting 5.31% on Monday. Demand at the week’s $119 billion of 3-, 10- and 30-year auctions was solid, with indirect bidders taking 80% of the 10-year note.

The household data were weaker. The University of Michigan’s preliminary October sentiment index fell to 46.3 from 48.1, and year-ahead inflation expectations rose to 4.7%. Revolving consumer credit — mostly credit cards — shrank at a 4.2% annual rate in August. The trade deficit widened to $105.6 billion as imports jumped $17.2 billion.

This week answers the question the Fed has framed. September CPI arrives Wednesday; August ran 3.4% from a year earlier, driven by a 16.3% jump in energy prices, while core inflation was 2.4%. Thursday brings PPI and retail sales on the same morning. And the six largest U.S. banks report from Tuesday to Wednesday, offering a direct read on loan demand, credit quality and how borrowers are coping with a 10-year yield above 5%.

The S&P 500’s daily closes traced a narrow range — 7,773.95 Monday, 7,818.93 Tuesday, 7,801.77 Wednesday and 7,765.36 Thursday — before Friday’s gain to 7,811.54. The minutes, released at 2 p.m. Wednesday, did not shake the market: the 10-year yield fell six basis points to 5.22% on Thursday, the day of Waller’s speech and the 30-year auction.

The yield curve flattened only slightly. The 2-year fell three basis points to 4.80% and the 10-year four to 5.24%, leaving the 2-to-10-year spread at about 44 basis points (QBH arithmetic). Investors are still demanding a premium to hold long-term debt even as the Fed signals more tightening.

Households: The drop in revolving credit is the surprise. After August spending rose 0.9% while income grew only 0.2%, a pullback in card balances suggests households funded spending some other way — or that lenders tightened. Sentiment at 46.3 is low, and inflation expectations are moving the wrong way for the Fed: the long-run measure rose to 3.5% from 3.4%.

Trade: August’s $17.2 billion import jump widened the goods deficit to $136.6 billion. Net exports subtract from GDP, so this weighs on the advance Q3 estimate due Oct. 29.

Labor: Initial claims stayed at 197,000, so layoffs remain low. The slow rise in continuing claims, to 1.716 million, fits a market where people who lose jobs take longer to find new ones.

The minutes contained three signals. First, the center of the committee expects to raise rates again: “most participants” said another increase “would likely be appropriate by year end.” Second, they no longer see the labor market as the bigger risk — “almost all participants assessed that, while inflation risks were tilted to the upside, risks to the labor market had diminished and were now broadly balanced.” Third, some doubt that policy is tight at all: “Several participants stated that they viewed the current policy rate as not restrictive or only mildly restrictive,” and a couple cited “energy market disruptions and AI-related demand” as reasons for caution.

Waller’s Oct. 8 speech in Istanbul read the newer data the same way: “Overall, the new data reinforce my view that the labor market is stable and inflation is too high.” He added, “I am not greatly concerned that tighter monetary policy threatens a damaging slowdown in the economy.”

What that means for Wednesday: With the Fed saying policy is focused on inflation, September CPI carries more weight than usual for the Oct. 28 decision. In QBH’s reading, the most important line is core CPI. Headline inflation has been pushed up by energy, which the Fed cannot directly control; a rise in core would suggest energy costs are spreading into other prices.

Demand for duration held up. Dealers — who absorb whatever other bidders do not take — were left with just 2.54% of the 10-year note, an unusually small share, while indirect bidders, a group that includes foreign buyers, took 80%. Long-term yields above 5% are attracting buyers.

This week: There are no note or bond auctions. Monday’s bill auctions move to Tuesday — $95 billion of 13-week and $82 billion of 26-week bills at 11:30 a.m., then $95 billion of 6-week bills at 1:00 p.m. Treasury will announce a 20-year bond reopening (auction Oct. 21) and 5-year TIPS (Oct. 22) on Thursday.

Energy: The weekly petroleum report moves to noon Thursday because of the holiday. In the week ending Oct. 2, commercial crude stocks fell 3.2 million barrels to 424.1 million, gasoline rose 0.4 million and distillates were nearly flat. Natural gas storage rose 85 billion cubic feet to 3,500 Bcf. With Brent above $125 as of Oct. 6, energy remains the main driver of headline inflation.

The common thread is costs, not demand. Delta said demand “remains strong,” but its outlook absorbs what CEO Ed Bastian called “a $6 billion increase in fuel costs.” PepsiCo raised its revenue outlook while cutting its profit outlook, and CEO Ramon Laguarta said “additional structural cost reduction actions are being identified and will be implemented in the coming months.” Levi raised its profit outlook even though, in CEO Michelle Gass’s words, its “direct-to-consumer business fell short of our internal expectations.”