10-15-26 Inflation Runs Hot: What's Next for the Fed?

CPI came in 0.1 percentage point above expectations and the probability of an October 28 Fed hike rose from about 20% to over 50%, yet bond yields fell after initially rising; hotter-than-expected PPI also saw rates reverse after an initial spike. The speaker distinguishes short-term yields, which track expected Fed funds rates, from 30-year yields, which reflect broader inflation and economic trends over many years.

The speakers say higher yields can raise company borrowing costs and cause firms to delay plant investment or hiring when projects no longer meet return thresholds. They warn that excessive Fed tightening or sharply wider corporate spreads could make financing harder for CoreWeave and other less-fortified cloud companies, though they emphasize that this scenario is not currently happening.

The speakers describe a rotation away from mega-cap and semiconductor stocks, with equal-weight RSP and broader breadth recovering as health care and financials performed well and energy benefited from rising oil prices. Separately, retail investors bought nearly $3 billion in bond ETFs during October’s first seven sessions, favoring T-bills, ultrashort-duration funds, municipal bonds, and Treasuries while credit, loans, and CLOs received only 4% of their usual demand.

Credit spreads are widening gradually, with CCC-rated debt near its highest spread levels since around 2008, but the speakers characterize the increase as small relative to past surges and not evidence of acute market-wide stress. The speaker cautions that CCC spreads can move disproportionately when one troubled issuer is affected because the category contains relatively few bonds, unlike the larger BBB issuer pool.