Fed Rate Cut Pause: What September's CPI Data Means for Your Trades

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Welcome to Stock Market Today, your market briefing with actionable insights on stocks, bonds, crypto and the events moving markets.

Let's get into it. The Federal Reserve is sitting at a pivotal juncture. The most recent hard inflation data we have is the August Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, which came in at 3.4% year over year.

According to Reuters reporting from September 30th, that figure landed below the 3.7% economists had forecast. That's a downside, sir, that eases some immediate hike anxiety. But the September Consumer Price Index report, the one markets are watching, had not been released as of this recording. That report is the centerpiece of the trading setup ahead. Let's be precise on timing. When traders talk about October's CPI data, they mean the report measuring September price changes that gets released in October. That distinction matters when you're setting expectations around the calendar and positioning for the reaction. Digging into the August PCE internals, Sal Guatieri, Senior Economist at BMO Capital Markets, offered nuance. The share of PCE price components rising faster than 3% annually fell from 54% to 51% month over month. That's progress. But Guatieri was clear. These levels remain much higher than normal. Translation, inflation is moderating at the margins, not collapsing. The broad-based nature of price pressures hasn't fully resolved. New York Fed President John Williams delivered the most direct policy signal. He stated he saw no urgency to follow up the Fed's most recent interest rate increase with another hike in October. That's a meaningfully dovish leaning comment. But Williams paired it with a caveat. He still expects another rate hike will be needed by year's end. Read together, that's a pause, not pivot framework. The Fed isn't declaring victory over inflation, but it doesn't feel it needs to move at the very next meeting. The Fed's next scheduled policy meeting falls on October 27th to 28th, which gives the September CPI report, plus the September jobs report and other releases due in early October.

Outsized importance as inputs into that decision. As of late September, futures markets were pricing in only about a one in three chance of a rate hike at the October meeting. At the same time, traders were assigning higher probability to a hike happening by December. That suggests the market consensus leans towards skip October, revisit in December, rather than no more hikes at all. This positioning sets up a classic binary reaction trade around the CPI release. A hotter-than-expected September CPI print would likely cause that one in three October probability to jump sharply. A cooler print would reinforce the pause narrative and could push hike expectations out even further toward December or beyond. Let's run through the directional implications across asset classes.

Equities, particularly tech mega-caps. These rate-sensitive names have the most to gain from a confirmed pause. Lower discount rate pressure on long-duration growth stocks tends to reduce volatility in support valuations. Conversely, a hot CPI surprise would likely hit this cohort hardest given their sensitivity to rate expectations. Bond yields, the prevailing expectation is for yields to stay relatively stable or drift lower if the market's no October hike view gets reinforced by the data. We covered yesterday how the 10-year hit 5.28% and the 30-year reached 5.62%, levels not seen since 2002 A hotter print would likely send yields even higher as the market reprices hike odds upward.

The US dollar, a less aggressive rate path, is generally a headwind for dollar strength since it narrows the yield advantage that's been attracting flows into dollar-denominated assets. Traders watching the DXY or dollar crosses should expect this inflation data to be a key swing factor. Sector rotation, financials, which typically benefit from a higher for longer rate environment and steeper yield curves, may see some near-term headwinds if a pause narrative solidifies. Meanwhile, consumer-sensitive sectors could see early rotation interest as traders position for a less restrictive rate backdrop heading into year-end. For crypto, this matters. Bitcoin trades at $83,722 this morning. As we've tracked, spot Bitcoin ETFs extended nine consecutive days of inflows, totaling $3.1 billion through the end of September despite that Treasury yield pressure. A confirmed Fed pause would reduce the yield competition that's been pressuring non-yielding assets. A hotter CPI print and renewed hike expectations would likely add selling pressure across crypto as risk-off positioning intensifies. Now let's talk about what's still unknown. As of October 3rd, several key data points referenced as due Friday and earlier reporting, including the monthly jobs report and the September CPI report itself, were not yet reflected in available source material.

This briefing is describing the market's positioning ahead of those releases, not their outcomes. No confirmed outcome from the October 27th to 28th FOMC meeting exists yet, as that meeting is still several weeks away.