Inflation Looms Large. Stocks fell for the fourth straight day of trading ahead of tomorrow's critical inflation report.

The Nasdaq Composite ended the day down 0.7%. The Dow Jones Industrial Average fell 0.6%, or 316 points. The S&P 500 also slid by 0.6%.

Today's continued market pullback was driven by surging oil prices and a sell-off in global sovereign bonds-all of which sent 10-year US Treasury yields to over 4.9% at one point. That's closing in on what some consider the 5% tipping point.

U.S. crude oil topped $100 a barrel again today, the first time since May, before ending the day closer to $103. Meanwhile, Brent oil futures settled above $107 per barrel as fighting in the Middle East intensifies.

The higher gasoline prices globally, as well as rising natural gas costs, pushed the European Central Bank to raise interest rates on Thursday from 2.25% to 2.5%. The decision was widely expected, and it is the second time the euro zone has tightened since the Iran war started. The increase sets the stage for more hikes next year, but the path ahead is uncertain.

"The trade-offs are harder now," writes Davide Oneglia, economist at TS Lombard. "We still think the ECB can hold their nerve, but patience is running out."

Thursday's producer price index data was in line with expectations, but still posed a fairly strong 0.4% month over month gain thanks to a surge in diesel prices. That sent the odds up to 71% that the Federal Reserve would hike rates at its policy meeting next week.

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The Decision Will Be in the Details

Tomorrow's inflation data will be critical in helping determine how likely the Federal Reserve is to raise interest rates at its policy meeting next week.

The Bureau of Labor Statistics is set to release the August CPI data tomorrow at 8:30 a.m. Eastern.

Consumer price index data for June and July showed inflation weakening, following a spike earlier this year due to the Iran war. If August delivers another month of cooler inflation readings, the Federal Open Market Committee may vote to hold the fed-funds rate steady at the Sept. 15-16 meeting-despite strong expectations for a hike.

The consensus estimates about tomorrow's CPI mean the Fed's decision is closer than the oddsmakers would have you believe. Economists anticipate inflation climbed 0.4% month-over-month in August, up from July's 0.1% growth rate, according to FactSet. But on a year-over-year basis, the numbers looks cooler. Inflation is expected dip to 3.3% in August compared to July's 3.4% pace.

Core CPI could show an even more optimistic trend. It is expected to rise 2.4% on an annual basis in August, which would be the lowest rate in more than five years-and a deceleration from July's 2.5% pace of growth.

Federal Reserve Chairman Kevin Warsh recently said that to get a better sense of underlying inflation patterns, he studies the individual components of price measures to determine how many are still growing by more than 3% a year. That's why Fed watchers will be focused on tomorrow's CPI data, which feeds into other more prominent inflation metrics like PCE inflation.

Keep in mind, however, that the Fed's traditional blackout period is currently in effect-there will be no officials providing their take on how the latest data will impact their vote. That means investors are on their own to to judge whether Friday's inflation reading is cool enough to give the Fed some leeway to hold-or hot enough for a hike.

The Calendar

Kroger reports second-quarter fiscal-2027 results tomorrow.

The BLS releases the consumer price index for August. Economists forecast a 3.3% year-over-year increase. The core CPI is expected to rise 2.4%. A 2.4% annual increase would be the slowest inflation rate since March 2021.

The University of Michigan releases its Consumer Sentiment survey for September. Expectations are for a 51 reading, about one point less than in August. Consumer sentiment continues to be well below the historical average.

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