Last week closed on the payrolls report, and the report did not disappoint. The American economy added 162,000 jobs in August, nearly three times what had been expected, and July's loss of 23,000 was revised into a gain. By the logic of the past month, that should have been the number that settled the September decision.
It settled very little. Odds on a hike at the 16 September meeting stood at around 58 percent before the release and at around 58 percent after it. What moved them this week was not a statistic from Washington but a barrel from the Gulf. Brent, which ended last Thursday below 89 dollars, pushed above 105 by this Thursday, and the probability of a hike climbed with it to roughly 70 percent.
That sequence says something about the market Kevin Warsh has created. A central bank that declines to guide does not leave a vacuum. It leaves a vacancy, and this week oil applied for the position.
A strong number that changed little
On its face the August report was unambiguous. Payrolls rose by 162,000 against a twelve-month average of 31,000, unemployment held at 4.1 percent, and revisions added 55,000 jobs to June and July combined. The narrative of a labour market sliding toward contraction lost its foundation in a single morning.
The composition is less convincing. Food services and drinking places accounted for 59,000 of the new jobs and local government education for another 42,000, while the information sector shed 23,000. Average hourly earnings rose 3.1 percent on the year, which is below headline inflation. American workers are being hired, but they are not being paid enough to keep pace with prices, and that is not the profile of a wage spiral the Fed needs to break.
What the report did achieve was to remove the one argument against tightening. It came in strong, and the option of a September hike stayed live. The White House noticed: over the weekend the president urged the Fed to cut and to "BE PATRIOTS for a change," while several large banks moved their forecasts to a hike next week. A Fed that has stopped explaining itself is now being explained by everyone else.
Oil takes over the guidance
The move in crude was not driven by sentiment. Saudi Arabia told OPEC that its output fell to 6.238 million barrels a day in August, the lowest since 1990, with exports down to 3.2 million barrels, a thirteen-year low. With Hormuz effectively closed, the Houthi blockade of the Red Sea has now compromised the western route as well. Reports that Iran had targeted American warships did the rest. On Thursday Brent cleared 105 dollars, its highest since May, and WTI traded above 100 for the first time in four months.
The same day, producer prices for August came in at 0.4 percent on the month and 5.4 percent on the year, with core producer prices at 4.6 percent. Those figures sit upstream of what consumers will pay in the coming months, and they were recorded before the latest leg of the oil rally.
This is where the absence of forward guidance begins to cost something. In an earlier regime, a Fed official would by now have explained whether the committee looks through an energy shock or treats it as a threat to expectations. Warsh has chosen not to supply that reading. The market has therefore adopted the simplest available rule, which is that every dollar on the barrel adds to the odds of a hike. That is not a policy framework. It is a reflex.
The ECB hikes into a supply shock
On Thursday the ECB raised its deposit rate by 25 basis points to 2.50 percent, effective 16 September, the same day the Fed announces its decision. The move itself was fully priced. What the market reacted to was the assessment. The staff projections left headline inflation at 3.0 percent for 2026 but revised 2027 up to 2.5 percent and 2028 to 2.1 percent. Growth was revised up as well, to 0.9 percent this year and 1.4 percent next, on what the Governing Council called the greater than expected resilience of the euro area economy.
Christine Lagarde declined to anticipate the next move, and warned that gas prices in particular could rise further in the event of new supply disruptions. European gas is already at its highest since late 2022. Markets now assign better than even odds to a third hike on 29 October. The ten-year Bund yield reached 3.45 percent, its highest since April 2011, the German two-year rose to 3.19 percent, and the spread between French and German ten-year yields touched 91 basis points, the widest since 2012.
Last week's argument still stands: raising rates does not reopen a strait. But the upward revision to growth changes the calculation. An economy that is absorbing the shock better than forecast gives the ECB more room to lean against it, and less reason to wait.
Gold loses its footing
Last week oil retreated while gold advanced. This week the roles reversed. Gold held a narrow band around 4,400 dollars for most of the week, then fell some 1.7 percent on Thursday to around 4,330 as real yields rose and the dollar strengthened across the board.
The logic is instructive. Gold hedges the risk that a central bank will tolerate inflation. A market that prices a seventy percent chance of a hike is pricing the opposite risk. The metal is not losing its role. It is losing its argument, at least for now.
Where this leaves the markets
The August consumer price report is published this afternoon. Consensus looks for 0.4 percent on the headline index, keeping annual headline inflation at 3.4 percent, and 0.2 percent on the core. A hot number would all but seal a hike on Wednesday.
Two cautions apply. Most of the latest oil move falls outside the August survey period. And CPI is not the measure Warsh has named. Core PCE, which this series follows, stood at 3.3 percent for the fourth consecutive month in July, and the August reading is not due until 30 September, two weeks after the decision. The committee will vote without its own preferred number for the month in question.
That makes Wednesday the first real test of what Warsh promised at Jackson Hole. If the Fed raises rates, they go to 3.75 to 4.00 percent. The decision will come in a short statement of around 130 words, with as little explanation as possible. The market will see what the Fed does, but not why. It will have to guess, and this week showed that when it guesses, it looks at the price of oil.
