Traders raised the probability of a Federal Reserve interest rate hike next week to 70% on Thursday morning, according to the CME Group's FedWatch gauge, after a report showed rising wholesale prices in August and U.S. crude oil jumped past $100 a barrel.
Chances of a further increase in December also rose to close to 60%, as inflation dynamics appear stubborn. Jeffrey Roach, chief economist at LPL Financial, said that as the conflict with Iran drags on longer than expected, inflation pressures are becoming increasingly entrenched, and "a hike in rates next week appears likely."
The producer price index, a measure of wholesale and pipeline cost pressures, rose 0.4% in August, in line with forecasts. That followed an upwardly revised 0.1% increase in July, pushing the annual PPI level to 5.4%, slightly higher than forecast. U.S. crude rose 4% to just over $100 a barrel amid intensified Middle East hostilities. The European Central Bank also announced a quarter percentage point hike and raised its inflation forecast, citing concerns about the Iran war's economic impact.
David Russell, global head of market strategy at TradeStation, said the ongoing spike in oil, combined with low jobless claims, makes it hard for the Fed to avoid a hike next week.
