Inflation, midterms and hikes

The September CPI prints this morning, and the market has already priced a lot. If you take a loook at the charts below, CME FedWatch has a hold on Oct 28 at 79.3%. For Dec 9, it has 70.6% on 4.00–4.25% and 17.6% on 4.25–4.50%, signaling a 25 bps hike.

Here's the three potential outcomes and the scenarios:

🔴 Hot print (above consensus, especially core):

The 20.7% October hike probability grows, and December shifts toward 4.25–4.50%. With CPI and PCE both running near 3.8% on recent readings, the Fed has little room to argue this is noise.

🟡 In line (headline about 3.6–3.7%, core about 2.4–2.5%):

Not much changes. October stays a hold prior to the Mid term elections and December stays the base case for another quarter-point hike. The Fed keeps pressing the "higher for longer" message.

🟢 Soft print (below consensus, especially core):

The case for a December hike weakens, and the 11.8% "no change" probability grows. A soft core number would also suggest the energy-driven headline is not spreading.

What to watch: core matters more than headline here. The Fed targets PCE, and CPI is the early read on it. A gap between hot headline and cool core would point to gasoline prices, not broad price pressure. The probabilities for a hike are low for October mainly due to the fact that the Midterms are 6 days after the FOMC meeting, and the Fed does not want to be perceived as damaging the already weakened odds for the republicans, particularly in the senate.

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