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CME FedWatch had July hike odds at 10.7% on July 15. By July 22 that was 34.7%, and it's sitting around 35-38% now. September hike odds are close to 80%, that's the market repricing the whole back half of the year inside two weeks.
The consensus case is still reasonable, Core CPI for June was flat month over month, headline cooled to 3.5% from April's 3.8% peak, and a hold would be the Fed's fifth straight. Chair Warsh has been deliberately light on forward guidance since taking over, which gives him room to sit still without committing to anything. Most economists still call a July hike unlikely on the numbers everyone's trained to watch.
The case above isn't fully realising the current picture, Brent crossed $100 a barrel this week on the Houthi tanker attacks and the broader Iran escalation, and Fed Governor Lisa Cook said in a July 15 speech that she is watching both sides of the dual mandate, price stability and maximum employment. However, she has stated at several points this year, the risks from high inflation concern her more at this time. On the Fed's own preferred gauge, Cook flagged inflation running near 3.7% through June, not the friendlier CPI number. Close to half of policymakers in the June minutes already said they'd back a hike later this year, before oil made this latest leg. The 10 year yield has now risen five straight sessions to about 4.68-4.70%, its highest since January 2025, with some desks calling for a test of 5%.
That yield is the part that actually re rates equities, not just the Fed decision itself. The 10 year is the risk free rate sitting underneath every discounted cash flow model on the market. When it rises, the present value of cash flows that are years out gets smaller, and that hits hardest exactly where the payoff is furthest away, which is precisely the AI infrastructure spenders reporting this week. Microsoft and Meta report Wednesday, hours after the 2pm rate decision. Apple and Amazon follow Thursday. Microsoft's guiding toward roughly $190B in 2026 capex, Amazon toward around $200B, Meta raised its range to $125-145B. Options markets are pricing implied moves of 5% or more on several of these names into the prints. After Tesla's 14.5% single day drop last week on a quarter that beat on revenue and delivered record deliveries, punished purely because the market didn't like the size of the capex number, I think the bar for these four is now proving the AI spend is turning into revenue, or eat the same reaction, and eat it with a higher discount rate working against you at the same time.
My claim is if the Fed hikes 25bp Wednesday, or Warsh names September specifically as live in the press conference, this stopped being an oil story and the market underpriced it. If he holds and waves off the oil spike as transitory without hedging that, the current hike odds were a two week panic in Fed funds futures and mean revert by Friday. We'll know by Wednesday, and we'll know whether the capex numbers held up by Thursday night's close.
How is everyone else viewing the current macro backdrop and it's weighting towards you're equity positions?