Fed Hike Odds Hit 70 Percent for December, and Today's CPI Decides If It Sticks

Markets now price roughly a 70 percent chance the Fed raises rates in December, up from 45 percent a week ago. Not a cut. A hike. The repricing started with Friday's strong jobs report, and it gets its first real test today at 8:30 ET, when the May CPI lands.

For most of the past two years the only debate was how fast the cuts would come. The funds rate sits at 3.75 percent after last year's easing, and that was supposed to be a station on the way down. Then the Strait of Hormuz closed in late February, energy prices took off, and April CPI jumped to 3.8 percent from 3.3 percent in March. Add a labor market that refuses to crack, and the cut story quietly died somewhere along the way.

The numbers behind the shift are simple. May payrolls came in at 172,000, well above expectations. Before the report, CME FedWatch had December hike odds at around 52 percent. By Friday's close they were near 68, and they now sit around 70, up from 45 a week earlier. Bonds sold off on the data, with the 10-year yield at 4.55 percent. Today's consensus calls for 4.2 percent headline CPI, which would be the hottest since April 2023, with core at 2.9 percent. PPI follows Thursday.

The repricing is visible everywhere rates touch, which is everywhere. Gold trades at $4,327, near its lowest level since late March, and that's with an active war in the Gulf, normally a tailwind. The dollar index holds near 99.8. Crypto has taken it hardest: Bitcoin sits around $62,600 after starting the month above $72,000, and ETH at $1,668 has been under $2,000 since early June. Equities are the calm ones for once, with the S&P 500 at 7,387.

If today's print lands at or above 4.2 percent with a firm core, the December hike becomes the base case and the conversation moves to whether one will be enough. A soft number, and the odds fade fast, with gold and crypto the obvious relief trades. The wrinkle is that this inflation is mostly energy, a supply shock from a blockade. Whether you hike into that is a debate the Fed itself hasn't settled. Watch the core versus headline split today, that's where the real signal is.

Two months ago markets argued about the timing of cuts. Now they argue about the size of a hike. That is how fast a closed strait can rewire monetary policy. Today's number either confirms the new regime or hands everyone an excuse to forget it.