The magic 5%-line for the 10-year Treasury yield seems to be the new floor, after being the ceiling it couldn’t break through for three years.
By Wolf Richter for WOLF STREET.
That was a lot of volatility for the 10-year Treasury yield in the four-day week, driven by hot inflation data on one hand, and a scare about the mania in AI stocks and bonds that triggered a safe-haven trade on the other hand. After everything was said and done, it was the biggest weekly rally of the 10-year Treasury maturities since mid-February (prices rose, yields fell).
The 5%-line for the 10-year Treasury yield was a ceiling that the market had bounced into repeatedly from September 10 through September 22. It had first bounced off of it intraday in October 2023, after which it had taken nearly three years to get back to the 5%-line. Then it broke through the 5% line, and WHOOSH to 5.30% intraday by September 30.
Then 5.30%-ish became the ceiling that it kept bouncing into. At the 10-year Treasury auction on October 7, it took a yield of 5.30% to sell all $39 billion of 10-year notes.
The last time it bounced into it was this week on Wednesday. Within moments after the hot CPI report was released, it spiked from 5.19% to 5.33% briefly.
But then there was the scare about AI stocks and bonds. Shares of AI data-center company CoreWeave plunged on Wednesday and ended the week down 23.5%, and AI bonds took a beating in general, chip stocks fell – the PHLX Semiconductor Index plunged by 11.4% during the week – all kinds of stuff was going on, and investors fled into Treasuries on Wednesday and Thursday and drove up prices and drove down yields of longer-term maturities. The 10-year yield kept falling until it hit a low point of 5.04% Thursday morning.
That was a 24-hour 29-basis-point drop in the 10-year yield. In price terms, it was a huge rally. But the yield didn’t make it to the 5.0%-line. Buyers vanished before it got there, and so the yield worked its way back up a little and ended on Friday at 5.10%. It looked like 5%-ish became the new floor for the 10-year Treasury yield.
The chart shows the drama of the 10-year Treasury yield in hourly increments from October 8 through October 16.
Bond investors haven’t seen those yields in over 20 years, and those yields seem tempting. But these are also iffy times for holders of long-term bonds.
Inflation is out of the bottle and has been accelerating for over a year, while the Fed has cut its policy rate last fall into this accelerating inflation. This is concerning because a purposefully lax Fed, that allows or encourages inflation to fester, is a nightmare for bondholders. Inflation eats up the purchasing power of bonds, and investors want to be compensated for that, plus some, with yield. A lax Fed is a reason to not hold bonds unless yields are high enough to compensate for those risks.
Then there are the fiscal issues of the US government that cannot get its deficit to come down from the 6%-of-GDP nightmare level, even during a growing economy. Congress isn’t even talking about it. Bessent is talking about it, but he doesn’t control the purse strings, Congress does. And Trump is out there trying to buy votes come hell or high water, thereby making the fiscal mess worse. That’s a scary combination for potential bond buyers.
Rising yields are a huge risk for existing bondholders. When yields rise further, market prices of bonds fall, and existing bondholders can see big price declines. The 30-year Treasury bonds that were sold at the auctions in the summer of 2020 with yields of just over 1% are trading at around 50 cents on the dollar now. So the threat of higher inflation, bigger deficits, and more supply of new bonds to finance those deficits point to higher yields in the future – and that’s a scary thought for bond buyers. Do they really want to expose themselves to that risk? The answer is yes, if the yield is high enough.
Those 5%-plus yields for 10-year maturities used to be considered normal to low – back when the government’s deficit-to-GDP ratio was much smaller, inflation was lower, and QE hadn’t yet polluted everyone’s mind.
That 5.30% auction yield on October 7 was the highest auction yield since November 2000. But in the first half of 2000, auction yields were in the 6.5% range.
The 30-year Treasury yield zigzagged lower from 5.73% just ahead of the 30-year auction on October 8, to a low of 5.39% on Thursday October 15 – a plunge of 34 basis points – and has since then wriggled up a little and on Friday closed at 5.43%.
The chart below tracks this years-long journey to higher yields. The black double-line connects the major lows over the past four years. The dotted black line reflects the trend line calculated from the data within the timeframe of the chart. The dotted blue line indicates the Effective Federal Funds Rate (EFFR, blue) which the Fed targets with its policy rates.
With this drop since October 8, the 30-year yield has reverted to trend, after breaking out of the trend to the upside. And for now, the trend line, amid this zigzagging higher in fits and starts, still holds.
Zooming out a little, the sharp drop of the yield since October 8 was actually just another little squiggle in the long-term dynamics of the past three decades.
Short-term yields moved little this week, with the 3-month yield edging up 1 basis point to 4.26% by Friday, still pricing in one rate hike in its window.
The 6-month Treasury yield edged up 2 basis points during the week to 4.34% by Friday and is 46 basis points above the EFFR (3.88%), pricing in nearly two rate hikes within their window.
The path back to higher, historically more normal yields is fraught with risks after 14 years of financial repression. So it’s good for the bond market to take its time to get there in fits and starts, and to take a breather every now and then, rather than getting there all at once and spooking the bejesus out of everyone.
Suddenly higher long-term yields can be treacherous for companies that have to refinance their maturing fixed-rate debts, and those yields can scuttle new investments, and credit markets can get dicey if it happens too fast.
But when yields zigzag higher at a measured pace, with lots of breathers in between – yields have risen a lot already from mid-2020 – companies and credit markets can adjust to them and deal with them more easily, so that the higher yields can work themselves into the economy without blowing up something big.
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Hot Tip: Core-Weave Bonds Now 15% – Get in now before you’re priced out forever!!!
Coreweave aka the WEWork of AI!
Apparently they are intermediaries for AI data centers. To find someone to use the stupid things if rich family A or B built the stupid thing. Then say Amazon wants to lease the stupid thing.
Problem is they want to sell both sides for 15 years and data center equipment will likely be out of date by then. So this 15 years is losing value in the eyes of everyone atm.
A nice WeWork Wtf moment! Ha
If I understand it correctly, bondholders essentially become creditors to the issuer, and so they enjoy certain protections and priority over stock (equity) holders.
So it is much safer to buy the bonds now, than the stocks will ever be?
I mean if they blow all their money and go bankrupt will there even be money there for a judge to dispense to bond holders?
foo,
“Safer” is a relative term. it depends on the details of the particular bond issue. Bondholders are above equity holders in the distribution post-bankruptcy, but whether bondholders receive anything depends on 1) whether the bonds are secured or unsecured; 2) whether the collateral is actually worth anything, and 3) where your bonds sit in relation to other company debt.
Equity holders usually get wiped out in bankruptcy, but the unsecured creditors don’t often fare much better. If they go bankrupt, you lose 100% of your money with the equity, and 90% of your money with unsecured bonds.
Wolf may still have the link to a piece i wrote back in the 2020-21 time frame about buying a lottery ticket in the debt of a company called Denbury Resources (then ticker DNR). It’s a pretty good example of what happens to unsecured creditors.
“If they go bankrupt, you lose 100% of your money with the equity, and 90% of your money with unsecured bonds.”
This is broadly true.
Sadly, a *ton* of bond buyers think they are getting far more downside protection (for giving up upside return potential) than they really are.
My guess is that a *lot* of bond buyers think they have secured (by collateral) debt when they don’t.
The big institutional players (investment banks and commercial banks) – who “structure”/market the financial offerings of essentially every corporate entity in the US of any significant size, in essence reserve collateral protection for themselves (by lending truly secured loans – not unsecured bonds – to the corporate giants and everybody else of any significant economic size).
The riskier securities dross is then palmed off into the public markets (just as the trashier tranches of CMBS, CLOs, etc.) get palmed off into the public markets.
It is a small club – and you (and I) ain’t in it.
I had never heard of Core-Weave bonds. So I looked them up. They were issued in June 2026 at 9.675% and are now trading at a yiled of around 15%. If your financial planer or stock broker recommended these bonds when they were first issued, it is time to get a new financial advisor or maybe just leave your money at the bank.
The bigger holders are likely bond funds, life insurance companies, pension funds around the world, etc., not retail investors directly.
Who can afford a financial advisor in this economy.
Someone wants to take 1% AUM, tell them where they can go.
US Treasury Interest Costs Hit Record $1 Trillion, Risking Debt Snowball
You’re forgetting tax receipts, which also spiked. You cannot look at interest payments in a vacuum — I discuss this in quarterly updates:
https://wolfstreet.com/2026/08/27/quarterly-update-on-the-ugly-fiscal-condition-of-the-us-in-q2-2026/
With federal tax receipts up so much according to your chart, why is the federal deficit now increasing and now at $2+ trillion each year?
Total expenses, not interest expense alone.
Kinda cool finance story floating around about how Schwab is helping the rich use funds that maximize their loss harvesting. Apparently they use shorts on top of other investments to get the losses. Management fees of 1% and over for the service to avoid taxes.
Because the Federal government is expected to receive 5.4T in revenue while spending 7.4T in 2026, leaving a 2T deficit to be covered by issuing new bonds.
The tax receipts revenues against interest payments comparison tells you how vulnerable/robust the debt is to changes in metrics behind each (gdp growth and tax rates on one side against (deficit) spending and interest rates on the other). For a debt snowball / spiral, we would be looking at a chart where those two lines converge rather than diverge, and at some point in the future cross, marking the moment where just paying interest alone requires taking on more debt (or default/devalue the dollar). The bigger the spread, the lower the (perceived) risk that this will happen as it currently seems that future tax income will be sufficient to cover future interest payments.
The quick conclusion is that we’re fine to let the economy run hot. However, since we can’t directly influence interest rates, and with a structural lack of political will to either cut spending or increase tax rates, we’re building a bigger and bigger dependency on economical momentum (gdp growth and therefor tax revenue growth) to sustain covering both the still increasing deficits as well as the rising interest payments with more debt.
In addition, the shift to t-bills (shorter maturity) decreases the chance of managing a soft landing if the growth ever comes to an end, as the average federal interest rate starts to more closely follow current rates and starts to get influenced more heavily by interest rate expectations. I.e. if the music ever stops, it will stop more abruptly.
I think your scale is off Wolf, but tax receipts relative to interest it is accurate.
Federal Tax Receipts: $3.814T as of June 2026.
That is up 7.7% from $3.54 trillion a year earlier. The level has grown 7.6% a year over the past 5 years and 6.6% a year over 10 years. That is a record high.
Interest is about 1.25T
No, you cannot include Social Security receipts because they’re not part of the budget. SS is self-funded, so SS receipts go into the Trust Fund and outlays come out of the Trust Fund, and are not part of the budget, and the SS receipts are not available to pay interest with. So you have to subtract SS and similar Trust Fund items (there are several smaller ones) from the tax receipts. Then you get the figure I have. The BEA does that for you, as I explained in the article, so you don’t have to do it yourself.
The 6-month yield curve looks almost scary good at predicting changes in the EFFR. Very few “oops” moments.
In the 10-year hourly yield chart there is a curious pattern interruption on 10/13 . It looks discontinuous, almost sparse. Any thoughts about what’s going on there?
Debt is always a fixed amount unless it’s convertible debt then it still can be fixed , cash flow floats up and down. Debt to equity shows how much leverage businesses have, when equity goes down they become more leveraged up with debt. With the government debt; GDP (floating) and tax receipts(floating cash flow) show leverage ratio too. Dot com bubble years before the tears :) no USA debt was generated, the bubble gave us a balance budget for a period of time, today’s peak bubble 2 trillion in new debt added. New Bubbles just are not producing the returns for the government like they use too plus we the taxpayers have more risk in upcoming hangover (DTs hallucinations and shakes) from generating the fiscal stimulus to produce todays bubble. We have run out of free money to purchase growth some time ago. We have sacrificed future growth for our Children’s children to make a bunch of billionaires and 1 trillionaire very happy. More inflation for the opportunity cost to keep the capital class happy will create a revolution in my opinion and Kevin Warsh knows this too, or he is being dishonest with his past words. Time will tell:) have a good weekend!
The 6mos to EFFR suggests it’s time for a Jumbo rate hike!
The economy may not be running as hot as advertised. The difference between the seasonal adjusted gross domestic product and the non-seasonal gross domestic product is 8.5 to 5.0 (percent change from the preceding period). That may be why interest rates took a break.
Not seasonally adjusted data should never be used to pass judgment on month-to-month or quarter-to-quarter changes. Year-over-year only.
Thanks. I don’t intend to swim upstream.
Ummm yeah it’s running really hot.
5 year tips coupon doubled since the april 23rd auction.
That’s a pretty good sign.
It’s basically a runaway train 🚂 AND Americans keep spending!
Seems like rate hikes in this environment will help the short end more than the long. Perhaps it is just me but I keep reducing my equity positions and pop them into treasuries. Most short term but a few small 3 year plays too. I don’t consider myself savvy enough to play in metals like gold, silver, copper and so on, plus guessing those are competing with treasuries.
Taking some profit. Nice
Just buy a few gold coins. Never sell them even if they go up in value 1000 times. These coins will get you through a 1929. Hope you never have to use them.
Sure, take you gold coin that will be worth the equivalent of like $10,000 so you can buy some beans. I’m sure the middle man will have change to break it down for you. Then find out that the guy who has no gold coins owns lead and he is more than willing to make a ballistic exchange with you.
When society turns to s–, it’s delusional to be strategizing over assets and money. I have been through this thinking so many times are realized it has merit to it and can make a lot of sense, but ultimately it’s a fixation of eccentric thinking that will cause more problems than it solves. Obviously there is a long chain of thinking-based decision making to be able to elaborate the point effectively but it is similar to things in life that are put in perspective by things such as being confronted closely with your own mortality, the value of love in various forms, the boat anchor effect that can be created by material wealth, the lonely hoarder, the lord of the flies type scenario, and the inability to eat gold or produce more wealth from such strategy.
I actually support your suggested approach to a large extent based on logic, but also have become resigned to or accepted the reality that there is very little that people fixate on wealth that isn’t based on futile and self defeating approaches to life.
The only real thing I can see that seems to be worth more than dirt these days is to make your heart into gold so that you may actually have a chance to take it with you when you die.
I wish there was an easy way to recommend and highlight comments here. Your’s deserves more love.
Excellent comment in my opinion. I would also emphasis the importance of community, forged links of support and friendship that are able to flow both ways.
Several years ago an ‘outsider’ moved into our valley after she inherited a large sum of money. She was quick to snap up property in a distasteful and aggressive way. She makes unguarded comments about others, and even makes purchase offers on properties not even for sale. This is beyond offensive for rural Canadians. In times of trouble, fires or flooding, I’m not sure if the neighbours will go beyond watching what unfolds. Her money is a strike against her, actually.
That was beautifully written. I’m saving a copy.
JimL
Not with PHP!
😆
Too soon? /s 😉
Not to mention they’ll look the same and have the same intrinsic value if gold falls to $20 or so per ounce.
Gold has more down years than up years.
The ups are wild, the downs are basically it languishing for 20 years.
Reversion to the mean
Could also be a crowd kind of deal, when the economy has trouble all the crowds run up gold.
We’ve never lived through a Depression in which gold prices weren’t fixed. Everyone assumes that gold will hold its value. Maybe it will. But there’s no guarantee.
I argue 2000-2009 was the depression.
Millions lost jobs, millions lost homes.
It took a 20 year war and financial repression to pull out of it.
13+ years for the market to recover its losses. In that time Au went from 300 to 1800.
Sounds like a depression to me,
instead, they called it a recession twice.
First of all, 2000-2008 had below average unemployment, and real GDP barely dropped in 2001 before resuming its usual growth rate.
The recession of 2000 was largely concentrated in stocks and Internet companies. For everyone else it was a fairly mild recession.
Perhaps you meant 2008-2014? The worst recession since WW2? Unemployment of 10% and a 4% drop in real GDP?
Even so, the unemployment rate in 2009 was half what it was in 1933 (20-25%), and the drop in GDP in the Great Depression was over 5 times as large (25-30%).
It’s not even close. The only reason you’d even think so is if you don’t know the Great Depression, or you lost a lot of money on the stock market in 2000 and 2004.
These were downturn blips compared to the GD, just saying.
You don’t hold physical gold in order to transact. Gold is, and will always be, the preferred collateral. It has no counterparty risk and will allow you to fund your business/life once the new monetary system is established. We are currently entering that transition period. The dollar isn’t going away, but many sovereigns are moving out of dollars, or more concisely, the Federal Reserve Note..
“[Ralph Wanger] likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle to Central Park South through the park. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.” (William Bernstein)
Let’s take our eyes from the short-term results, and consider our long-term expectations for:
– US deficit
– Inflation
– Bond Yields
– AI compute
They will move up and down on a monthly basis, but the long-term direction is clear: they are all moving “northeast”.
Also known as the drunken walk.
Just in time for my forced retirement, a 6% 10yr??
Don’t forget the 3.7% all-items CPI inflation — which seems to be growing.
You summed it up very nicely with, inflation is now out of the bottle.
Scary for those of us who fought and suffered the results of the 70s inflation bout….with unemployment and retrenchment. While it is not the same these days, there are similarities. I do know this, the cure for individuals is to either cut back on spending whenever possible, or go under. This means luxuries like dining out, take out, travel vacations, and buying stuff, stops. Paying the bills for essentials becomes the only priority. Or, you lose your house, or your car, and your confidence.
Past causes:
“Energy Supply Shocks: Major oil crises—the 1973 OPEC oil embargo and the 1979 Iranian Revolution—quadrupled crude oil and energy prices, dramatically increasing costs across the entire economy.”
Well, diesel only doubled so far, but we definitely have had loose monetary policies for a long time, especially after Covid that yes, actually did kill 1 million Americans (so the fear was real and needed to be overcome with loosening).
But there are drastic fiscal imbalances and no real efforts to control spending. The debt keeps growing but will tax receipts keep up in a declining economy?
So far the only things missing today for runaway inflation are the dramatic wage price fights and spirals of cost increases. (give it time).
This is NOT the time to increase personal debt, especially for housing in a declining market. If you have cash to buy outright? Sure, your cash is worth less everyday, anyway. A paid off sensibly sized home is a good way to fight tough times.
My Dad was a teen in the Great Depression. He did not climb out of the malaise until he joined up for WW2 and then walked back into a retooling World. He used to talk about living in a MN farm town during those times. “We always had enough to eat, hell we grew and caught our food. We just never had any money. None.” My mom had one dress and a pair of gum boots for shoes. My point is this, 70% of the economy is now consumer driven. What happens when discretionary buying declines? (which will happen because it has to). Unfortunately, Govt has already ballooned debt in the good times and if they try to boost a declining economy by spending they may make things worse. It’s easier to say things are just great, never been better.
That’s okay, as long as there’s a new ballroom, arch, and golf course standing tall and proud above the swamp.
Whenever the next recession comes, things will get very interesting. Those tax revenues will certainly fall, while interest expenses will not. Hard to imagine things not spiraling out of control, but I guess the chart shows interest expenses/GDP where almost double today’s levels during the 1980’s, and we survived that somehow.
We are witnessing a technological change as important as the Industrial Revolution, which will cause many jobs to be displaced — but intellectual productivity (and all productivity that comes with that) will go through the roof.
The next 5 years are going to be wild.
You got to ask, How did we get here? For perspective “ Colombia ran a primary deficit of about 3.5% of gross domestic product in 2025, while public debt stands at roughly 60% of GDP and is rising, IMF Western Hemisphere Department Director Nigel Chalk said… ‘This is not a sustainable, tenable situation… We do think that the country needs a concerted effort to bring down debt.’”~ Bloomberg. Where were our safeguards? Run it hot, stay calm and trust the outcome, no worries until it collapses. Ha the reserve currency is ours to lose, the dollar should rally more when stocks sell off picks up steam and yield continue to rise. When the futures open tonight oil and yields should “gap” up.
3% deficit, 60% debt is actually fairly sustainable under normal conditions. That’s where we were for most of the 90s and 00s.
I thought we calculated our budget deficit; subtract total income from total expenses. If the result is negative, than divide for % to get budget deficit. Honesty, not sure if the author use of GDP was a mistake or in fact was % of GDP. You imagine if the IMF publicly said we ran the pro forma our (USA) our math model says you past the point, you are a zombie dead man walking credit bomb waiting to default. When I say default I am referring to yield restructure to 1% or pay with printed usd via QE or some other creative Monetization to provide additional run way. Back to % of gdp if we borrow 2 T on a 32.28T GDP we get 6.19% so math is similar for us but that has to be coincidental with our numbers :) cheers
AI bubble about to burst; Big market correction coming…
ZITRON: I TOLD YOU! THE MATH ISN’T MATHING…
“AI bubble about to burst…”
Nasdaq up over 400…. If only I had a dollar for every time somebody predicted the AI bubble bursting. Meanwhile, it continues growing massively.
Does anybody expect demand for AI to go down in the next 2-3 years?
As a software engineer, I see demand growing exponentially.
Demand for email didn’t got down either over the years, kept going up. But it became fee for consumers after the dotcom bust.
Will be interesting to see how much primary dealers short this weeks 20yr issue before getting stuck with a big % of the auction. I think they took about 20% of the last one. Not likely room on their balance sheets to keep absorbing and holding that much every auction.
$10 TRILLION ‘AI BOOM’ STARTING TO CRACK
Stock futures are up hugely. Dip buying.
Last Friday the Treasury issued the final deficit report. In reading one link to that I saw that the Treasury was reducing long bond issuance and moving to short term bills….
Now,of course, I can’t find where I read that. Anything of note in that report that you saw?
Waiono,
Treasury has been talking about it all year, last year too. That’s not going to work on a large scale until the Fed is ready to swap its long-term Treasuries for T-bills, which it has been talking about for two years as well. The Fed could buy $2 trillion in T-bills and shed $2 trillion in notes and bonds as they mature over the years, which would create lots of demand for T-bills, but the bond market would have to absorb that additional $2 trillion in notes and bonds (reverse operation twist). So the Fed’s change back to mostly T-bills and maybe repos (which is how it used to run its balance sheet before 2008) would drive up long-term yields. If Treasury issues more T-bills for the Fed to absorb, and fewer long-term notes and bonds, it would roughly balance out what the Fed is doing.
There is a big risk associated with that: T-bill auction interest rates rise and fall with expected Fed policy rates. If some years down the road, there is more inflation piling up and the Fed has to hike a lot more, the US interest payments will spike. Interest on long-term notes and bonds doesn’t rise until they mature, which gives a lot of stability to US interest expense. By trying to shift to a lot more T-bills, Bessent is wagering that he won’t be in office when that next surge of inflation happens, and it’ll be some Democrat’s problem.
6:32 AM 10/19/2026
Dow 51,947.57 -54.84 -0.11%
S&P 500 7,700.80 +41.36 0.54%
Nasdaq 26,415.57 +275.53 1.05%
VIX 18.34 -1.65 -8.25%
Gold 4,179.00 -2.10 -0.05%
Oil 100.57 -0.84 -0.83%
“Then there are the fiscal issues of the US government that cannot get its deficit to come down from the 6%-of-GDP nightmare level, even during a growing economy. Congress isn’t even talking about it. Bessent is talking about it, but he doesn’t control the purse strings”
I am going to call BS.
Bessent might recognize that the fiscal issues are out of control, but he isn’t trying to do anything about it. Yes he doesn’t have control, but he has influence. The chasm between his words and actions tell a different story than you are implying. Bessent cares much more about keeping his boss happy and keeping his job than he does about the fiscal issues facing this country. Bessent literally does not care about the fiscal problems facing this country. Whatever his words, his actions betray him
You apparently don’t understand how the US government works.
Or rather, doesn’t work, as it careens deeper into the debt abyss.
For those people even considering long term bonds, just knkw that this administration is in denial about inflation. Everyone in the administration, even those who should know better. They think that if they just keep spinning otherwise that they can influence reality.
Most deny the reality of inflation. Those who wander out on a limb are only willing to say that it is temporary and will disappear as soon as the mess in Iran goes away. It is only gas prices and they are temporarily high.
Unfortunately for all of us, there isn’t an easy end to the mess created in Iran. It won’t end anytime soon. Furthermore, inflation has moved well beyond gas prices. If anyone who has paid any attention to quality sources of information like Wolf, you would know that inflation inflation is running hot well beyond gas prices.
Incompetence is what incompetence does.
Inflation is the GOAL, BOTH PARTIES. What rock have you been living under?
Yes, this administration is certainly incompetent, Trump is the dumbest president ever, Warsh is a horrible choice as Fed Chair (forgoing forward guidance!), and Bessent is even worse than Bill Simon and gay to boot, right?
If only we’d elected Harris, everything would be great, wouldn’t it?
Here’s the thing, everyone (a significant majority being ‘everyone’) knows inflation is out of the bottle and interest rates are going to the moon. That’s what I’m watching as a natural contrarian.
When you find yourself agreeing with ‘everyone’, it’s time to reconsider the situation, isn’t it?
1:10 PM 10/19/2026
Dow 51,966.03 -36.38 -0.07%
S&P 500 7,690.73 +31.29 0.41%
Nasdaq 26,430.89 +290.85 1.11%
VIX 18.44 -1.55 -7.75%
Gold 4,161.40 -19.70 -0.47%
Oil 103.58 +2.17 2.14%
S&P 500 and Nasdaq close higher as tech stocks surge, but Dow slips as yields rise
I don’t know if I would call Core PCE of 3.0% and Core CPI of 2.6% “hot” inflation.
After all, if 2.6 – 3.0% is “hot”, then what would 5% or 10% be? Red hot? To me it seems more accurate to say “moderately above target” which is why I don’t write headlines, lol.
Yes, we’ve seen a rapid increase in petroleum prices because our elected representatives are trying to start World War 3 in the Middle East, and these energy price increases have pushed up the non-core measures. However, the difference between core and non-core measures only shows how the main gist of the problem is located in the oil war.
“Core” measures are not “actual” inflation. They’re a measure of inflation outside of food and energy. The “all items” indices measure actual inflation. In addition, consumer price inflation (CPI and PCE) are only part of the inflation picture. Companies (PPI) and governments face their own inflation rates. Total inflation in the US economy is measured in the GDP data.
“Actual” inflation across the entire economy (consumers, businesses, nonprofits, and governments), as measured by the GDP deflator, was 4.0% year-over-year, and 6.1% quarter-over-quarter annualized in Q2. Q3 is going to look worse:
The Fed has a long pattern of reasoning their way out of immediate responses to inflationary spikes. If they can attribute a spike to temporary or “transitory” measures, then they will. They also prefer to let inflation be out of range for many months before taking action. 3% is not scary.
I do not think this tendency has changed. E.g. we did not get a rate hike 6 months ago when all items CPI was higher than it is today, because “let’s see how the tariff effect wears off and how soon the Mideast oil resumes flowing.”
The problem is, there’s always some transitory excuse for inflation, and always some reason to believe lower inflation is right around the corner. We’ve seen this for the past 5 years. Every upward blip in the continuing claims or downward blip in PCE or GDP is interpreted as a turn in the right direction.
I am a bit confused by your reference to the GDP deflator. This includes prices governments pay and prices of things which are exported, whereas the consumer measures don’t. Thus, when the price of petroleum products goes up, the value of US exports of petroleum goes up and that is weighted in the GDP deflator a lot more than in CPI or PCE. It is a measure of prices, but the Fed has never considered it their preferred metric of inflation because it is somewhat divorced from the “cost of living” regular people experience. That’s why the Fed doesn’t target it.