With oil at $100/barrel and producer prices not remotely letting up, fed funds futures are pricing in a 70% chance of a rate hike come next Wednesday.
While the Fed, under previous leadership, is known for not bucking market expectations, if there was ever a time for it to do so, it's now.
As I've stressed aplenty herein of late, the notion of hiking rates amid the running of an exceedingly-high federal budget deficit, and in the face of $8+ trillion in debt to rollover in the coming months -- all of which will land right at the spot on the curve that fed funds directly influence -- and, not to mention, into an oil supply shock within two months of a mid-term election has me thinking that the market may indeed get surprised this go-round.
Yes, my best guess is that the Fed, with Warsh twisting himself into a pretzel in the process of explaining why, will not be hiking rates anytime soon... Clearly, the market says I'm wrong, which may very well be the case, and which, by the way, would have zero impact on our longer-term thesis... The policy incentives and constraints, and macro dynamics going forward spell out with high probability what we should expect in the years to come... As for the weeks/months to come, notable spikes in volatility are the high-probability events.
I'll be on vacation beginning tomorrow, be back on 9/21... However, I will remain connected and may pop in on you herein if/when news or conditions compel me to offer up some perspective.
Note, by request going forward, the AI-assisted updates (the second part of most written blog posts these days) will include a summary (this morning's titled "In Brief") of their content for those of you who prefer to capture the gist without wading through all the minutia.
Here's today's:
When the Oil Price Sets the Interest Rate*
September 10, 2026
Markets are lower again this morning, and the reason is the same one that has driven most of the past two weeks: oil. Crude has pushed back above $100 a barrel as the conflict between the United States and Iran has escalated into direct attacks on tanker traffic near the Strait of Hormuz. The strait, which in normal times carries roughly a fifth of the world's seaborne oil, remains largely closed. Gasoline is averaging over $4 a gallon nationally, and diesel — the fuel that actually moves freight and farm equipment — is at record levels.
That last point is why an energy story has become an inflation story, and why an inflation story has become an interest rate story.
In brief
- Oil is the driver. Crude back above $100 on escalating US-Iran attacks on tanker traffic. The Strait of Hormuz remains largely closed. Record diesel prices are feeding directly into inflation.
- Inflation is re-accelerating at the wholesale level. August producer prices matched expectations month-over-month but accelerated to 5.4 percent annually. Consumer prices are out tomorrow morning.
- We think the market has next week wrong. Futures now price a quarter-point increase at roughly 70 percent. Our expectation is that the Fed holds. Either way, the European Central Bank has already gone the other direction, raising rates this morning and citing the energy shock by name.
- Long-term borrowing costs are at multi-year highs — not because growth is strong. Investors are demanding more compensation to lend long, and a trillion-dollar-plus pre-election spending proposal this week added to that. We have described this as fiscal dominance.
- Gold fell despite the war escalation. That is by design, not a malfunction: we hold gold as a real-interest-rate asset rather than a headline hedge. Industrial metals reversed sharply after record highs. Defensive sectors held up best.
- Our downside protection worked and our cash is untouched. Index put positions gained over 13 percent as the price of protection rose. Reserves remain deliberately unspent ahead of a week with three separate market-moving events.
The data this week
Wholesale prices rose four tenths of a percent in August, matching what economists expected. That was the good news. The less comfortable figure was the year-over-year comparison, which accelerated to 5.4 percent from 4.8 percent the month prior. Consumer prices are released tomorrow morning, with forecasters looking for a similar four tenths on the month and 3.4 percent over the year.
Those two prints land four days before the Federal Reserve meets. The Fed has held its policy rate steady at three and a half to three and three quarters percent, but that decision was not unanimous — three members of the committee voted to raise rates at the last meeting. Following the Chair's remarks at Jackson Hole in late August, futures markets moved from expecting no change to pricing a quarter-point increase at roughly seventy percent. That is the market's case, and it is a coherent one. It is not ours, for the reasons laid out above.
The European Central Bank has already answered the same question for itself. This morning it raised its deposit rate by a quarter point to 2.50 percent, its first increase since the summer pause, and said plainly that the Middle East conflict is generating inflation pressure that will keep prices well above its target for an extended period. It is worth noting what makes Frankfurt's decision easier than Washington's: the ECB is not simultaneously financing a deficit of this size, and it does not have an election eight weeks out. Whether the Fed follows is a genuinely open question, and we do not think it will.
Why the long end matters more
The bond market has been the real story of this stretch. The ten-year Treasury yield closed Wednesday at its highest level since late 2023, and the thirty-year is above five and a quarter percent. Notably, this is not happening because growth expectations are strong. It is happening because investors are demanding more compensation to lend to the government for long periods.
This week added to that. Ahead of the midterm elections, a proposal was floated to send $5,000 to every American adult contingent on the election outcome — an idea independent estimates put north of a trillion dollars. Whether or not it ever becomes law, the fact that a transfer of that scale can be proposed casually, in an environment where the deficit already runs near six percent of output and neither party has shown appetite for restraint, is precisely the kind of thing long-term lenders price.
We have been describing this dynamic to you for some time as fiscal dominance: a setting in which the government's borrowing needs, rather than the central bank's preferences, increasingly set the level of long-term interest rates. This week was a fairly clean illustration.
What moved in the portfolio
Our internal conditions gauge continues to read defensively, and positioning reflects that.
Gold declined today despite the escalation in the Gulf. That surprises people, but it is consistent with how we have always described the position: we hold gold as a monetary and real-interest-rate asset, not as a headline hedge. When yields rise faster than inflation expectations, gold tends to fall regardless of what is happening geopolitically. Today it did exactly that. Silver, which behaves like a more volatile cousin of gold, fell considerably more. The industrial metals complex also had a sharp reversal after copper touched record levels earlier in the week, which weighed on our mining and materials exposure.
Communications services, consumer staples and utilities were the only sectors that finished the morning higher for us — a fairly typical defensive signature.
Our index put positions, which we hold specifically to blunt sharp market declines, gained more than 13 percent on the day. Worth understanding what that means: those contracts are struck well below current market levels and do not expire until late November. Their gain today came almost entirely from an increase in the price of protection — the market bidding up insurance — rather than from the market actually approaching those levels. That is the behavior we want from a hedge in the early stages of stress, and it is also why we sized them the way we did rather than larger.
Cash reserves remain near the low end of our target range. We have deliberately not spent them. In a tape where the inflation data, the central bank and the oil price are all capable of moving markets meaningfully within a five-day window, holding dry powder has an option value of its own.
What we are watching
Three things, in order of importance.
First, tomorrow's consumer price report and the Fed's decision next Wednesday. The market is positioned for an increase which we don't anticipate, the more consequential outcome for portfolios is arguably the one we expect: a hold would be a meaningful surprise to short-term interest rates. Either result sets the tone into October.
Second, physical shipping volumes through the Strait of Hormuz. We track actual tanker throughput rather than diplomatic headlines, because the two have diverged repeatedly this year. A ceasefire that does not reopen the strait does not lower the oil price, and we have positioned accordingly. There has been public suggestion that the conflict may resolve shortly after the November elections. We treat that as a possibility to be verified by flow data, not a plan.
Third, the long end of the yield curve. As long as thirty-year borrowing costs are rising for reasons of fiscal credibility rather than economic strength, the environment stays difficult for expensive assets and reasonably favorable for real assets, energy infrastructure and the sectors that benefit from government capital spending. That is where our overweights sit.
None of this is a forecast of crisis. Equity markets are down modestly over a few sessions, not disorderly, and the American economy has proven more resilient in the labor data than most expected as recently as August. But it is worth being direct about the near term: when the policy path is this contested and the oil price is this unstable, sharp bursts of volatility are the high-probability outcome, not the tail. That is what the hedges and the cash are for. And note that whichever way next Wednesday goes, it does not change the multi-year picture we have described to you — the incentives and constraints facing policymakers point the same direction either way.
*Prepared by Marty Mazorra, Chief Investment Officer, Private Wealth Advisors. The market recap section above was drafted with AI assistance and reviewed and edited by Marty prior to publication. This material is for informational purposes only and does not constitute individualized investment advice or a recommendation to buy or sell any security. Past performance is not indicative of future results.
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