The Fed Hike Is Priced. The War Is Not.

The S&P 500 closed last week at 7,657. That is down 62 points, the lowest weekly close since the end of July. It fell three days in a row into the inflation data, touched 7,580 on Thursday, and then bounced 65 points on Friday.

Friday's bounce came on the same morning the inflation report made a Federal Reserve rate increase close to certain. That sounds backwards. It is not. Markets hate not knowing more than they hate bad news, and Friday removed the last real doubt about Wednesday's decision.

So the question this week is no longer whether the Fed raises rates. It is what the Fed says about the next move. And it is whether a war that just reached the pipeline the world uses to get around the Strait of Hormuz keeps pushing oil higher while that decision lands.

The Main Scenario Played Out. One Call Was Wrong.

Last issue laid out Scenario A as the one the chart favored: inflation runs hot, the market fails below 7,757, breaks 7,706, closes down through the gap at 7,671, and opens 7,665 and then the 7,592 to 7,595 zone. That is almost exactly the path the week took. The high of the week was 7,718, well short of 7,757. The gap gave way on Tuesday. 7,665 broke on Wednesday. Thursday went 15 points through 7,595, closed 3 points under it, and Friday took it back. We said 7,592 to 7,595 was the real floor. It bent for one session and held. The deeper target at 7,498 was not reached.

Two calls were wrong, and they deserve to be stated plainly. We said the line at 7,498 would likely move closer again even if nothing happened, because it had been rising. It did not move at all. It got closer because the market fell. And we read the dollar's failure to rally on a strong jobs report as a sign its strength was fading. That was wrong too. The euro reached 1.1656 on Wednesday and then fell to 1.1527 on Monday morning, breaking the 1.1571 floor we had highlighted. On gold, 4,412 broke on Tuesday and 4,329 gave way on Monday.

Inflation Showed Up Exactly Where It Was Expected To

Last issue said the August inflation report would be the first to carry the energy shock. It did. Consumer prices rose 0.4 percent in August and 3.4 percent over the past year, both in line with forecasts. Gasoline alone rose 3.9 percent in the month. The number that mattered was core inflation, which strips out food and energy. It rose 0.3 percent against a forecast of 0.2 percent.

The day before, wholesale prices for goods rose 1.1 percent in a single month. That is fuel and freight costs working their way through the system. A consumer survey on Friday showed people now expect prices to rise 4.6 percent over the next year, up from 4 percent a month ago. Confidence fell to 47.8.

Two weeks ago, the Fed governor who sparked a rally said he would support holding rates if inflation kept improving, and would consider a hike if it came in hot. It came in hot. The odds of a rate increase went from about 58 percent a week ago to 72 percent on Thursday to about 87 percent on Friday. That would be the first increase in more than three years. The 10 year Treasury yield rose from 4.78 percent to 4.975 percent, its highest close since October 2023, and it was still near 4.96 percent on Monday afternoon.

The Market Has a Ceiling at 7,687 and a Floor That Keeps Bending

Start with the pattern. Since the record high of 7,817 on August 13, the S&P has made four peaks and each one was lower: 7,817, 7,771, 7,757, 7,718. It has made four dips and each one went lower: 7,639, 7,638, 7,611, 7,580. That is a downtrend, and it stays a downtrend until the market closes above 7,718.

The floor is the zone from 7,592 to 7,610. The September monthly support sits at 7,595. The average price of the last fifty trading days sits just above it. Thursday went through it for one session and closed back above it on Friday. Monday's early selling reached 7,592 and stopped again. That zone has now held three times in two weeks. Below it, Thursday's low at 7,580 is the line that matters. A close under 7,580 opens 7,550, which is this week's lower boundary.

The ceiling is unusually precise. This week's upper boundary is 7,687. Several separate measures of where a rebound should stall all land between 7,687 and 7,689. When that many unrelated references agree inside two points, it tends to act as a real wall. A rally this week that reaches that zone and fails there would fit the downtrend. A close above 7,718 would break it and put the 7,757 high back in play.

Then there is the number that changes the bigger picture. 7,498 is the line that would confirm the larger uptrend has broken. It did not move last week. The market is now 2.1 percent above it, the closest all year. Below that, the long term average price sits near 7,167 and is rising about 20 points a week.

Gold is at 4,353 after a sharp morning on Monday. It fell to 4,293, cutting through the 4,329 to 4,333 double bottom, and then bounced 66 points and closed back above both. That kind of flush and recovery often marks a short term low. Resistance is 4,383 to 4,386, then 4,408 to 4,412. A close back below 4,293 would open 4,133. The euro is at 1.1561, just under the 1.1571 floor it broke on Monday. The next support zone is 1.1508 to 1.1530. A close back above 1.1597 would mean the break failed. The dollar against the yen sits near 154.

The War Reached the Pipeline Around the Strait

The chart already leans lower into October, with lower peaks for a month and a floor that keeps getting tested. Energy is the story that would give the market permission to follow through. Last week drones launched from Iraq hit Saudi Arabia's East-West pipeline, which carries about 5 million barrels a day to the Red Sea around the Strait of Hormuz. Saudi Arabia shut it down. Iran also claimed attacks on two American ships and eight oil tankers, and fighting with the Houthis in Yemen escalated.

Brent crossed $100 on Wednesday for the first time since July and was near $105 on Monday. US crude is near $101 and diesel passed $6 a gallon. Watch whether that pipeline restarts quickly or stays down for weeks. A fast restart takes pressure off oil, yields and the dollar, which would help both stocks and gold. A long outage keeps inflation risk rising into a Fed that is already raising rates, which favors the dollar and weighs on gold.

Wednesday at 2:00 in the Afternoon

Tuesday brings August retail sales, the last read on the consumer before the decision. Wednesday at 2:00pm the Federal Reserve announces its decision, along with new projections for where officials see rates going, and Chair Warsh holds a press conference. Thursday brings weekly jobless claims. Friday is a large quarterly expiration of stock options and futures, which often brings outsized swings, and this one lands two days after the Fed.

A hike is close to fully expected, so the headline itself should not surprise anyone. The projections and the press conference are what move markets. If officials signal one hike and then a pause, that is a relief, and the 7,687 ceiling gets tested. If they signal more hikes before year end, yields likely push through 5 percent and the 7,580 floor gets tested instead. A 10 year yield closing above 5 percent would be its highest since 2007.

Two Ways This Week Resolves

Scenario A, the one the chart currently favors. The floor at 7,592 to 7,610 holds through Wednesday and the market bounces into the 7,687 to 7,689 zone. That rally stalls below 7,718, keeping the pattern of lower peaks intact. That would be a relief rally inside a downtrend, not a new advance. The larger path still points lower into mid-October, so a failure at that ceiling would set up the next leg down.

Scenario B. A hawkish message on Wednesday pushes yields through 5 percent and the market closes below 7,580. That opens 7,550 first, then 7,498. A close below 7,498 is the line that says the uptrend since March is over, and it would put the long term average, near 7,167 today and rising toward 7,266 by mid-October, in view. Each of those levels is a place to reassess, not a place to guess.

The honest counterweight to both: Friday's expiration can push price well past any level for a day and then snap back. Judge this week on Friday's close, not on Wednesday's reaction.

What to Do With This

Four things to hold in mind this week.

1. The hike is priced. The message is not. Read the projections and the press conference, not the headline.
2. 7,580 is the floor that matters. The zone above it has held three times. A close below it opens 7,550 and 7,498.
3. 7,687 is the ceiling. Several measures agree there inside two points. The downtrend only breaks above 7,718.
4. Watch the Saudi pipeline and the 10 year yield together. Oil and a 5 percent yield are the two things that could turn a priced hike into a real problem.

A final thought. The market has spent a month making lower peaks while it waited for this week. A rate hike, $100 oil and a big options expiration all land within four days. This is a week to let the levels do the work.