CICC expects a December move. Rate cuts look remote for the next year.

• Headline CPI rose 0.6% in September and 3.7% from a year earlier
• Gasoline accounted for more than half of the monthly gain
• Fed officials see more hikes ahead but are in no hurry

US consumer prices rose faster than expected in September, so the Federal Reserve still has more tightening to do. China International Capital Corp. expects the Fed to hold off this month and move in December. Hardly anyone in the market is talking about rate cuts over the coming year.

The Numbers

• Headline CPI: up 0.6% from August and up 3.7% from a year earlier
• Core CPI (excludes volatile food and energy): up 0.3% on the month and 2.6% on the year

Both readings were higher than in August and above economists’ estimates.

Leveraged  ETF pairs for trading the swings: $Direxion Semicon Bull 3X(SOXL.US) $Direxion Semicon Bear 3X(SOXS.US) $Proshares UltraPro QQQ(TQQQ.US) $Proshares UltraPro Short QQQ ETF(SQQQ.US) 

What’s Getting More Expensive

Prices rose across many categories. Energy, goods and rent led the increase.

Energy led the way. Prices +5.2% MoM, gasoline +9.1% (over half the headline gain), heating oil +15.3%. Middle East tensions unresolved — October likely higher too.

Everyday goods also climbing.Core goods +0.3%; toys +4.2%, apparel +0.3%, likely on back-to-school demand and fall lines.

AI is adding to inflation. Data centers are going up nationwide, and computer-related prices are rising with them. Software and accessories are up 28.4% from a year ago; computers, peripherals, and smart speakers are up 9.7% — both the largest on record.

Rent remains sticky. Shelter costs rose 0.4%; owners’ equivalent rent rose 0.3%, and rent of primary residences rose 0.2%. Housing carries heavy CPI weight, so core inflation will struggle to return to 2% while rents stay high. Still, rising mortgage rates and a cooling housing market suggest rent inflation may not last.

Services outside housing are relatively tame, up 0.4%, a bit slower than August’s 0.5%. Mobile phone bills jumped 5.9% in August but were flat in September, suggesting the earlier spike was one-off. Transportation services rose 0.6%, and airfares rose 1.2% as higher oil prices passed through.

Why Markets Reacted So Sharply

After the release, the dollar rallied while US stocks and gold fell. Investors had already settled on a view of how fast the Fed would hike. The data upset that view and raised concern that an October hike had become more likely.

As fear spread and investors looked for downside protection, defensive sectors such as health care and consumer staples outperformed. Some well-known names:

$Berkshire Hathaway B(BRK.B.US) $Eli Lilly(LLY.US) $Walmart(WMT.US) $Costco Wholesale(COST.US) $Coca Cola(KO.US) 

Hike or Hold in October?

Views differ on whether the Fed will move this month. There are two main arguments for waiting.

First, the Fed has only one jobs report and one inflation report since September. Hiking twice in a row on that alone could split policymakers. 

Second, markets have already done some of the tightening: long-term yields are up, the dollar is stronger, borrowing costs are higher. Rate-sensitive sectors like housing are already strained, much like a hike. That buys the Fed time to wait and watch inflation.

Chart: 10-year Treasury yield has fallen below pre-CPI levels.

Several Fed officials have said much the same thing:

• Governor Christopher Waller said rates still need to rise, but the timing can be flexible. The Fed doesn’t need to hike at every meeting as long as rates reach the right level within a reasonable time.
• New York Fed President John Williams said one more increase this year may be appropriate, and further moves will depend on the data.
• Governor Michelle Bowman said there is time to watch how financial conditions and the economy change before deciding on more hikes.

None of them said hikes are finished. They just aren’t in a hurry.

CICC’s Call： the Fed to hold in October and hike again in December. A slower pace of hikes doesn’t mean the Fed is turning toward easing. The US economy is steady, the job market is strong and inflation is still high, so the Fed will keep liquidity tight for a long time. 

A rate cut in the next year looks unlikely. In short, borrowing will stay expensive for a long while, and the US economy and financial markets will both have to adjust to high rates.

What It Means for Investors

This is a sensitive month before the midterm elections, and high rates, high oil prices and high inflation are all weighing on markets. 

On the positive side, markets may slowly become less sensitive to rising Treasury yields, and overall earnings per share across the index can support valuations. $Micron Tech(MU.US)  Technology and $NVIDIA(NVDA.US)  alone account for 36% of the S&P 500’s aggregate EPS.

Consumer discretionary stocks are weak and small- and mid-caps keep falling, so large-cap heavyweights are holding up the index almost by themselves. That makes companies with strong cash flow and fast EPS growth especially important. $SPDR FD Consumer Discretionary(XLY.US) $iShares Russell 2000(IWM.US) 

On the negative side, the market may need a contained financial shock to release built-up risk all at once. Investors should keep watching VIX-linked ETFs and look for chances to go long. $Pro Ultr Cvix Shrt Futures(UVXY.US) $2x Long VIX Futures ETF(UVIX.US)