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Markets Are Priced 50-50 on a Fed Hike — and CPI May Not Settle It

A softer July jobs report and expectations of slightly cooler inflation are running into $90 Brent and an AI buildout that is pushing up prices before it pushes up productivity.

August 12, 2026 Rates & Fed

The unusual thing is which direction the debate runs

Markets are priced 50-50 on a Fed rate hike next month — not a cut — and Wednesday's CPI is the first of three inflation prints that will shape it, with PPI Thursday and PCE later in the month. Headline and core rates were expected to tick slightly lower, which alongside last week's softer July jobs numbers would douse hike speculation. Yet one view holds the data may have limited influence on the September decision at all, and this week's rise in oil won't show up in a July print. Wall Street futures ticked up ahead of the release.

Bond markets are absorbing supply, for now

Decent demand at Tuesday's three-year Treasury auction calmed nerves, with 10-year notes going under the hammer Wednesday — the more meaningful test given the CPI timing. Corporate issuance is not waiting: Martin Marietta priced a $5.5 billion senior notes offering. Issuers appear to be treating current levels as acceptable rather than betting on materially lower yields ahead.

Housing shows exactly how tight the transmission is

Five straight weeks of increases ended with a four-basis-point decline in the 30-year conforming rate to 6.77%, and that alone lifted total mortgage applications 3.6%, refis 5% and purchase applications 3%. The MBA explicitly attributed the move to oil prices dipping on hopes of a resolution to the war in Iran — a clean illustration that the mortgage market is currently trading the Middle East. The demand is fragile: refis remain 22% below a year ago with average refi loan size at its lowest since July 2025, and rates were already 10 basis points lower a year ago. Rates ticked higher again to start this week.

The AI buildout is an inflation input before it's a disinflation output

Silicon Valley's deflation story — Altman's "intelligence too cheap to meter," Son's forecast of a 40% price drop — is not showing up in the data. Goldman Sachs Research estimates US AI capex of $581 billion this year, 1.8% of GDP rising to 2.8% by 2028, and as much as $1 trillion globally; that spending is snarling supply chains and raising prices in sectors like electricity. Only 17% to 20% of US businesses reported using AI in a May Census survey, concentrated in large firms, and OpenAI's own chief economist concedes it will be a while before productivity statistics show it. Peter Boockvar notes the internet delivered just 1.5% productivity gains over 30 years. That leaves the Fed with visible costs and invisible benefits — a bias toward tighter, not looser.

The RBI offers the contrast case

India's retail inflation accelerated to 4.45% in July from 4.38%, roughly in line with a 4.50% poll, marking a second consecutive month above the 4% medium-term target — and is not expected to shift the RBI, which held the repo rate at 5.25% last week. Food inflation rose to 5.52% from 5.32% on weak monsoon showers, transport to 4.43% from 4.31%, and Governor Sanjay Malhotra attributed the overshoot mainly to fuel rather than broad-based pressure. The bank cut its 2026/27 inflation forecast by 10 basis points to 5%. Same shock, different response: a central bank willing to look through an oil-driven overshoot.

Sources

Not investment advice.