Despite Falling Oil Prices, There's Now a 73% Chance of an Interest Rate Hike by September -- Here Are the 2 Culprits to Blame

CME FedWatch shows the probability of a Fed rate hike by Sept. 16 jumping from 26% (Jun. 12) to 73% (Jul. 12), amid mounting inflation pressure. Core PCE rose to 3.4% in May (highest since Oct. 2023) for the 63rd straight month above the 2% target, with spillovers from the Iran war beyond crude prices. The article also flags AI infrastructure build-out—driven by GPU/memory supply shortages—as a new inflationary contributor, warning higher rates could quickly cool the stock market’s AI-led rally.

Analysis

The cleanest read is that this is not an oil trade anymore; it is a duration trade. Once market pricing shifts toward a higher-for-longer or hike-risk regime, the first-order loser is long-duration equity multiple, even if earnings estimates do not move immediately. That makes high-expectation AI names vulnerable to compression: the market is paying for cash flows that sit far out on the curve, so a 25-50 bp move in implied policy can matter more than a quarter of incremental revenue.

CME is the obvious structural beneficiary because rising policy uncertainty monetizes through rates, FX, and equity hedging activity. The second-order effect is that a hotter inflation backdrop can lift client engagement across the curve, even if directional equity volumes soften; this is the kind of setup where the exchange business can outperform without needing a growth narrative. On the downside, retailers like TGT face lagged input-cost pressure from freight, plastics, and inventory carry before consumers fully weaken, so margin risk can show up in the next two quarters even if gasoline is cheaper.

The contrarian point: the market may be overreacting to a single jump in hike probability. If core inflation rolls over in the next one to two prints, or if labor data softens, the odds can unwind quickly because this is still a pricing story, not a confirmed policy turn. The more durable risk is 6-18 months out: if AI capex and energy passthrough keep broadening inflation, the Fed may not need to hike often to cap multiples; it only needs to keep real rates restrictive.

Key Decisions for Investors

• Long CME on pullbacks into the next CPI/Core PCE print; 1-3 month hold. Risk/reward favors a rates-volatility hedge as long as Fed hike odds stay elevated. Falsify if hike probability drops back below 40% after benign inflation data.
• Pair trade: long CME / short NVDA on a beta-adjusted basis for 4-8 weeks. Thesis is policy-vol beneficiary versus long-duration multiple compression. Cover if 10Y yields fall materially or if NVDA guidance shows demand is outrunning supply enough to offset rate pressure.
• Use NVDA put spreads or QQQ puts into the next Fed meeting as a tactical hedge, not a core short. Best with 1-2 month tenor; the risk/reward is strongest if the market has already bid AI higher into the event. Invalidated by a dovish Fed pivot and falling real yields.
• Trim or short TGT into earnings season if management commentary starts to mention freight, packaging, or sourcing costs. This is a 1-3 month margin-risk trade; cover if core PCE decelerates for two consecutive releases.