CPI, Rate Hike Odds, and the Sectors Feeling the Pinch

SPEAKER_1 (0:00)

That's the set up as we obviously go into the weekend off the back of the CPI print, which did give us a little bit more certainty on rates as far as now what the market is pricing in with those probabilities. So let's talk more about that. To break down the inline reports is Bo Diamond, Managing Partner at Caisson Capital Partners. Bo, thank you so much for your time today. What did you make of the report that we got, the CPI?

Bo Diamond (0:23)

Well, first, Sam, thank you so much for having me on. There was not a ton in the components of the report that was surprising at all. Energy led the way, headline numbers, annual basis up 3.4 core at 2.4. The market really was reacting, though, to the August monthly core number up 0.3 versus sort of an expectation of 0.2. And all of this, I believe, the market is taking in context of sort of the recent history, Warsh's recent speeches at Jackson Hole, right? So as we looked at what we thought the Fed was going to do in September, Warsh had positioned himself to be a intentionally less vocal Fed chair and intentionally wants the Fed to give less guidance. But at Jackson Hole, he did indicate that he thought current rates were not restrictive.

And in the wake of this sprint, that was just slightly hotter than expectations, at least on the monthly core number, caused the jump in probability of a hike next week. I mean, to put it in context, the probability of a hike was 35 before Warsh's speech, 55 after his Jackson Hole speech, 70% yesterday and now up towards 90%.

SPEAKER_1 (1:54)

Well, that's right. And I mean, it all came down to a decimal point, didn't it? Because at the end of the day, you had Warsh's speech, which sounded more hawkish, at least at Jackson Hole. You then had a couple of Fed members like Williams, for instance, who was sort of talking about wanting to see 0.2% as the threshold on monthly core as far as he's concerned. And so we're starting to perhaps get a sense of what would then move a Fed member from a whole position to perhaps a hike. And that is what the market is reading into. I mean, would you say then this is a little bit more certainty on rates as to why we're perhaps seeing a relief rally of sorts?

Bo Diamond (2:35)

Well, I think that, I mean, one thing that everyone has to keep in mind is that if the market is relatively confident that the Fed is going to hike next week, single hikes are rare, right?

A first hike after an easing cycle usually begins with a hiking cycle. That doesn't necessarily mean that we're going to see eight hikes between now and the end of 2027, but could we see two or three? Certainly. And you have to pay attention, I think, a lot of attention to the steepest of the front end of the curve. The Fed funds to the two-year treasury is sitting at about 100 basis points. So two-year treasury rates, 4.63-ish with the Fed funds target right in the 3.63 rate. The market already is pricing this in.

SPEAKER_1 (3:26)

Yeah.

There seems to be a view that at least they take out the insurance cuts for now, as you say, when there's a big question over whether they hike next week, whether they're one and done. But interesting as you say, as far as the market currently pricing in, do you think it's pretty much well baked in? I mean, say if they go ahead with a hike next week, what do you suspect would be the market reaction?

Bo Diamond (3:53)

So I'm a commercial real estate professional, so I pay a lot of attention to the yield curve, particularly the middle and long end of the curve. The five to 10-year treasury is something that I track on a daily basis, and we've seen a run up in that part of the curve since really Q4, which could be couched as an anticipation of more restrictive policy from the Fed.

I would be, look, markets can do what they do. I would be somewhat surprised if we see massive moves in the rest of the treasury curve on the heels of a hike next week, given how conditioned the markets are, but we'll see.

SPEAKER_1 (4:35)

So, you are in the business of commercial real estate. I mean, you're an investor at least, and so you're keeping an eye on the yield curve. We're going to be talking about data centers later in the show, but I'm just wondering, you know, what's your take on just how restrictive rates are right now, given the economic data that we've been getting, which does show a degree of resilience, you know, particularly with all the AI capex, even the consumer seems to be hanging in there to some degree.