MSX US Stocks Daily Watch: CPI and PPI Both Heat Up, Expectations for Another Fed Rate Hike This Year Rise, Earnings Growth Continues to Offset High Rates

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Today's Observation

The latest US inflation data has once again sounded a warning to the market. The US Consumer Price Index (CPI) rose 0.6% month-over-month in September, up from 0.4% in August, while the year-over-year rate accelerated from 3.4% to 3.7%, slightly above the market expectation of 3.6%. Core CPI, which excludes food and energy, rose 0.3% month-over-month and 2.6% year-over-year, also exceeding market expectations of 0.2% and 2.5%, respectively.

The Producer Price Index (PPI) released a day later was even stronger. September PPI rose 1.3% month-over-month, far above the market expectation of about 0.5% to 0.6%, marking the largest single-month gain since March 2022; year-over-year, it rose 6.3%, the highest level since December 2022. With both CPI and PPI repeatedly coming in above expectations, it is clear that US inflation is reaccelerating, and the likelihood of another rate hike this year has risen markedly following the Fed's September increase.

However, the market is not currently treating an October rate hike as a certainty. As of the October 15 close, interest rate futures implied roughly a 27% probability of a 25 basis point hike in October, with the probability of holding rates steady still above 70%. But when the horizon is extended to December, pricing across different markets suggests a roughly 70% to 80% probability of at least one more rate hike this year. In other words, the market's current baseline judgment is not that the Fed will definitely hike again in October, but rather that the Fed will most likely choose one of its October and December meetings to continue tightening policy.

This distinction is very important for US stocks. If the Fed pauses in October and hikes in December, the market still has time to observe changes in energy prices, employment, core PCE, and financial conditions; if the Fed hikes for a second consecutive time in October, it would mean policymakers believe the risk of inflation reaccelerating already outweighs the value of waiting for more data.

Data in a Minute

September CPI rose 0.6% month-over-month, versus a 0.4% gain in August;

CPI rose 3.7% year-over-year, above August's 3.4% and the market expectation of 3.6%;

Core CPI rose 0.3% month-over-month, versus the market expectation of 0.2%;

Core CPI rose 2.6% year-over-year, above August's 2.4% and the market expectation of 2.5%;

September PPI rose 1.3% month-over-month, versus the market expectation of about 0.5% to 0.6%;

PPI rose 6.3% year-over-year, the highest level since December 2022;

The federal funds rate target range currently stands at 3.75% to 4.00%;

As of the October 15 close, the market priced roughly a 27% probability of a 25 basis point hike in October, with the probability of a pause exceeding 70%;

The market expects a roughly 70% to 80% probability of at least one more rate hike this year, with December remaining the more likely window;

After the CPI release, the 10-year US Treasury yield briefly broke above 5.32% before pulling back;

On the day of the PPI release, the 10-year US Treasury yield instead fell to about 5.08% to 5.09%, indicating the market did not directly interpret the high PPI reading as a guaranteed October hike;

On October 14, the S&P 500 fell 1.1% and the Nasdaq dropped 1.9%;

On October 15, the S&P 500 rebounded 0.3%, the Dow rose about 1.1%, and the Nasdaq was roughly flat.

MSX View

To understand this round of rising inflation, one must first distinguish between energy shocks and underlying inflation. September CPI rose 0.6% month-over-month, of which gasoline prices climbed 9.1%, contributing more than half of the overall increase. The PPI picture was similar: final demand goods prices rose 2.6%, with more than 80% of the increase in goods prices coming from energy, and gasoline production-side prices surging 20.3%. This shows that rising international energy prices remain the main starting point for this round of inflation rebound.

Interest rates cannot increase crude oil supply, nor can they directly resolve energy transportation and geopolitical issues. Therefore, even if energy prices push up short-term inflation, the Fed does not necessarily need to hike consecutively right away. What the Fed is more concerned about is whether energy prices are beginning to spill over into transportation, housing, services, and corporate costs.

Judging from the latest data, this spillover risk is increasing. Core CPI rose 0.3% month-over-month, rather than falling to 0.2% as the market expected; housing costs rose 0.4%, and services prices excluding energy rose 0.4%. PPI services prices rose 0.8%, transportation and warehousing services prices rose 3.4%, and trade services margins rose 1.4%.

This means businesses are facing not only higher gasoline and raw material costs, but also rising costs in transportation, warehousing, accommodation, and wholesale segments. Companies can choose to compress profit margins or pass costs on to consumers. If more and more companies choose to raise prices, producer-side inflation could feed through to CPI and core PCE in the coming months. This is also why the PPI data is particularly important to the Fed.

But the market's reaction to this PPI report was relatively restrained. After the PPI release, the 10-year US Treasury yield fell rather than rose, and the probability of an October hike did not continue to rise sharply. The reason is that the market is simultaneously weighing three factors:

First, the Fed already hiked 25 basis points in September. Monetary policy affects the economy with a lag, and some policymakers may want to observe the effects of the previous hike first;

Second, long-term interest rates have already significantly tightened financial conditions. The 10-year US Treasury yield remains above 5%, and the costs of mortgages, corporate bonds, data center financing, and consumer credit are all at elevated levels. Even if the Fed pauses in October, the financing environment facing the real economy is not loose;

Third, a large part of this round of headline inflation rebound still comes from energy. If crude oil and gasoline prices fall in the future, CPI and PPI could cool rapidly. The Fed needs to judge whether this is a temporary energy shock or whether it has evolved into more persistent services inflation. Therefore, the most reasonable current judgment is that another rate hike this year has become the market's baseline scenario.

For US stocks, this does not mean all sectors will come under pressure simultaneously. Higher rates first affect valuations, not necessarily corporate earnings immediately. Companies whose cash flows are concentrated in the distant future, that rely on continuous financing, or that carry high valuations are more sensitive to rate changes; companies with stable cash flows, lower debt, and stronger pricing power are relatively more resilient.

The AI industry also requires differentiation. Large cloud service providers have strong cash flows, allowing them to continue investing in data centers, GPUs, and networking equipment. Semiconductor, optical communications, and power equipment companies may also continue to benefit from AI infrastructure demand.

Therefore, for US stocks at present, even though inflation has raised the market's bar, what ultimately determines medium-term performance is still whether corporate earnings growth can continue to outpace the test of financing costs and valuation compression.

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Risk Disclaimer: Macroeconomic conditions and the US stock market are highly volatile. The content of this article is intended solely for academic and research observation reference by the MSX Research Institute and does not constitute any investment advice.