CPI Needs Strong Upside Surprise to Shake Fed, Factors Behind 10-Year Yield Rally

• September CPI report (released Wednesday) is the primary focus for Fed officials, with a consensus expectation of 0.2% or less for core CPI.
• The breadth of inflation (over 60% of CPI sub-components rising at 3%+ year-over-year) remains a concern for the Fed.
• The Fed is expected to pause rate hikes in October, but a December hike is highly probable (89.3% implied probability by CME FedWatch).
• The 10-year Treasury yield hovering above 5% without disrupting credit or stock markets is viewed positively, supported by strong nominal growth and corporate profits.
• Elevated energy prices are a potential risk, as sustained high prices could lead to demand destruction and further upward pressure on long-term yields.

The discussion centers on the upcoming September CPI report and its implications for Federal Reserve monetary policy, particularly regarding interest rate hikes. The guest anticipates the Fed will likely pause in October but implement one more rate hike by December. The 10-year Treasury yield's recent rise above 5% is attributed to strong economic fundamentals and corporate profits, with concerns about prolonged elevated energy prices.