Crude Awakening
The case for a hike on Wednesday starts with oil and the bond market has already moved to price the risk. Crude climbed through August and into September which alone is enough to keep inflation from cooling on schedule, and the bond market has already moved to price the risk. Equity leadership is rotating toward the sectors that tend to lead when prices are rising, and away from the ones that do not. The last word goes to a different question entirely around who to trust on the pace of AI.
Oil keeps inflation sticky, and rates have followed
WTI traded between $75 and $85 in August, enough to hold CPI at 3.4% on Friday's print, and the Labor Department said gasoline alone accounted for more than a third of the monthly increase. With Ukraine and Middle East tensions constraining international refinery production, and U.S. operable utilization running at 98% per EIA, near-term relief looks unlikely. September’s trends are equally troubling, if not worse, with oil trading between $85 and $105 through the first two weeks. Every $10 move in oil adds roughly 25 to 50 basis points to inflation, which puts the September reading at risk of coming in above expectations.
The supply side picture is offering little relief, with the Nov/Nov Brent-WTI spread pushing the $10 level, a new high for that series. Diesel also reached a new all-time high, with crack spreads near 106, up 70% from six months ago and signaling acute global tightness.
The bond market is not waiting for the data to confirm it. The 2-year yield has climbed about 30 basis points in September, and FedWatch puts the odds of a Wednesday hike near 85%. The long end is moving too. The 10-year closed at 4.96% even after Thursday's upsized Treasury buyback, which was meant to keep rates in check. Adding 10 basis points on a day when demand was unusually strong indicates the buyback was largely shrugged off, and Secretary Bessent's line about Treasury being "the House" reads as a comment rather than a market-moving action. Pave’s scores across the short-term Treasury and bond names have been sliding, which fits a market that is no longer treating those bonds as the automatic place to hide.
Energy leads, small caps lag
Sector leadership is telling the same story as the curve. Energy leads September at +1.52%, is up 22% so far in Q3, and is up 45% on the year, well ahead of second-place Technology at +28%. Materials is the only other sector beating the S&P this year. Energy and Materials are the cleanest equity read on inflation, and their leadership tends to track rising prices. Technology is a separate case where pricing power dictates durability to inflation and channel checks show memory prices firm to start September. Pave's sector scores lean the same way the tape does, with Energy near the top of the board.
The same backdrop pressures small caps. Rising inflation lifts input costs and raises credit risk through higher rates, and small caps carry both. That favors large caps into the fourth quarter, and the early signs are showing, with the equal-weight S&P lagging in August after leading in June and July. Pave's scores tilt toward large caps over small, consistent with that rotation. One factor worth watching: the GS High Beta Momentum basket climbed 69% through the first half of 2026 before reversing in June and giving it all back to flat before July ended, one of the largest single-factor selloffs in over a decade. When a crowded factor unwinds that fast, size and quality are usually where money goes.
Red pill, blue pill
The debate over how fast to adopt AI has an odd split. The people building it, Dario Amodei and Sam Altman among them, have urged caution on the pace of integration and adoption. Government, the side charged with looking after its constituents, has reached for the blue pill instead, pushing to move as fast as possible and leaving the harder questions for later. Wall Street seems to be sitting with the government, though its position is driven by money and profits. The question of who to trust with the call should probably sit with the people who understand the technology best, the ones developing it; though lately, prudence and circumspection get treated as character flaws instead of virtues.
By Stephen Evans, CFA
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