Inflation came in hot enough to melt your groceries and bonds somehow shrugged · Daily Briefing

In 30 seconds: September CPI and PPI came in significantly hotter than expected, with PPI jumping 1.3% month-over-month (the largest since March 2022), pushing annual producer inflation to 6.3%, while bond yields paradoxically fell and markets digested implications for Fed policy and core PCE. Markets saw a sharp rotation out of AI and high-growth stocks into defensive and low-volatility names, with South Korea's KOSPI suffering its worst 7-day decline since COVID, while broad US market breadth remained surprisingly strong and Bitcoin briefly dipped below $80,000. The IEA agreed to release over 400 million barrels from emergency reserves amid escalating Persian Gulf shipping attacks near the Strait of Hormuz, while US commercial petroleum stocks posted their largest weekly draw since April and energy analysts debated oil price trajectories. A busy slate of US economic data showed retail sales beating forecasts at +0.8% but flat in real terms, mixed regional manufacturing readings, steady jobless claims, and signs of consumer strain as real wages fell for a sixth consecutive month amid rising mortgage costs.

The prior month's reading was revised up to 0.5% from an initial print of 0.4%. The breakdown was ugly because of the magnitude of price increases AND the breadth. Energy surged 10.8% month over month; goods prices rose 2.6%, which one economist called the largest goods price increase ever, driven by energy. Food added 1.2%, services rose 0.8%, transportation climbed 3.4%, and trade margins expanded 1.4%. Core services posted 0.3% month over month. AI-driven pricing pressures persisted in September, with computer software prices rising a record 28% year over year. Upstream, PPI Stage 4 intermediate prices ran at 8% annually, a non-pandemic record. The September CPI and PPI translate into a core PCE projection of around 0.34%, which would be the highest monthly reading since January. And yet bond yields fell. We really need to take some time and understand how things will evolve within the economy."

S&P 500 advancers: 241. Going back 25 years, the S&P 500 has fallen more than 1% on a day with that strong of breadth only six other times. Over two days, equal weight outperformed the Nasdaq 100 by 3.1 points — the 6th such stretch this year. $RSP Equal weight has beaten $QQQ by 3+ points. The factor scoreboard tells you where the pain is. High Beta, Pure Growth, and Momentum are the only three U.S. equity factor indices in negative territory month to date. Meanwhile the Low Volatility factor index is up 4.0% month to date, and defensive dividend stocks have bounced over the last week as investors have rotated out of the AI/growth trade. Carlyle $CG, Blackstone $BX, Blue Owl $OWL, and KKR $KKR are all now more than 15% below their 50-DMAs. Abroad, South Korea's KOSPI has fallen over 20% in the last seven trading days, its worst 7-day decline since March 2020. Bitcoin briefly dipped below $80,000 just before 10 AM ET, then immediately rallied. CoreWeave $CRWV touched an intraday low just below $60 before bouncing about 9 dollars. The current bull market is now 48 months old, well past the 39 months average. The average bull delivers 101% in nominal gains. You are invited to decide whether that is comforting or ominous.

The US isn't getting the additional 100 million barrels it requested, only a vague mention that the total amount of stocks released would exceed the original total (approved in March) of 400 million barrels, but that excess isn't quantified. Meanwhile, the physical market is tightening on its own. US commercial petroleum stocks fell by 13.4 million barrels last week, the largest weekly commercial draw since April. The draw was driven by crude, diesel, and 'other' products (largely NGLs). Crude inventories are now back below trailing 5-year seasonal lows and falling at a time they should be building. On the demand side, US gasoline supplied to the domestic market ran at 8.9 million barrels per day in July, but the structural trend is falling as increases in vehicle fuel economy more than offset the growth in population and vehicle-miles travelled. So the barrel itself may not be the binding constraint. Two vessel sinkings occurred over the past roughly three weeks, out of more than 110 shipping attacks since the beginning of the conflict with Iran. Speculators are positioned accordingly, with net long crude at 51-52% of open interest, close to the March peak. The difference is that this positioning is flowing into a market with more crude coming out than in March.

The labor market continues to do its impression of a person who is fine. Initial jobless claims came in at 199000, ticking up from 198000 the prior week, a move of 1000 that registers as 0.51%. This is the kind of number that lets everyone project whatever narrative they prefer onto it. If you think cracks are forming, you note that the number moved in the wrong direction. Both of you are reading too much into one week of data, but that has never stopped anyone. Average hourly earnings up 0.13% on the month. That is, in nominal terms, a raise. Average hourly earnings: $37.81. Initial jobless claims: 199,000.