Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Odds of a Fed Hike Surge as Oil Rips Higher
Transcript
- Lucas: So there's a headline that crossed the wire this morning that I think deserves a proper unpacking. CNBC ran a piece with the line, 'Odds of Federal Reserve rate hike surge as oil prices rip higher.' That's not a typo — we're talking about a potential rate hike, not a cut, in the middle of 2026. Luna: Yeah, that stopped me too. Because just a couple of months ago, the conversation was all about when the first cut would come. Now we're flipping the script entirely. Lucas: Exactly. And the data backing it up is real. You look at the 10-year Treasury yield — it's at 4.67 percent as of July 22nd. That's up from 4.63 just a week prior. The 2-year is at 4.31. So the spread is still positive, but it's narrowing. And oil — West Texas Intermediate crude — it's been grinding above $100 a barrel for a few sessions now. Luna: Right. And that's the trigger. Oil at triple digits is a powerful inflation signal, especially when the core CPI is still sticky above 3 percent. Markets start asking, does the Fed have any room to ease? Lucas: They don't. At least not in the short term. The CME FedWatch tool, which tracks fed funds futures, had been showing zero probability of a hike at the July and September meetings. But over the past two weeks, that's shifted. The odds of a quarter-point hike at the September FOMC meeting are now roughly 18 percent. That's not a done deal, but it's a massive swing from zero. Luna: And it's not just September. The December meeting probabilities are showing a nearly 30 percent chance of at least one hike by year-end. That's a meaningful repricing. Lucas: It is. So the question is, what changed? I'd point to two things. First, the oil price — it's not just a spike, it's sustained. We've had geopolitical tensions in the Middle East and ongoing production cuts from opec plus. When oil stays above $100 for weeks, it seeps into transportation costs, plastics, chemicals — basically everything. Luna: Second, the GDP data. We got the advance Q2 print on July 1st, and it showed annualized real GDP growth of 2.1 percent. That's up from a sluggish 0.5 percent in Q4 2025. The economy is actually accelerating, not slowing. Lucas: Right. So you have stronger growth plus an energy-driven inflation shock. That's the classic recipe for a central bank to tighten, not loosen. Now, the Fed has been on hold since last September when they did that final 25 basis point hike. But this new data mix is forcing a rethink. Luna: And the bond market is reflecting that. The 10-year yield pushing toward 4.7 percent is not just about growth expectations — it's about term premium. Investors are demanding more compensation for the risk that inflation stays higher for longer. Lucas: There's a subtlety here though. The 2-year yield is also rising, but it's lagging the 10-year. So the spread is actually narrowing — it went from 36 basis points to 34 basis points yesterday. That's not a steepening that signals confidence; it's a flattening that often precedes a recession signal if it goes negative again. Luna: So the bond market is giving a mixed message: short-term rates pricing in a possible hike, but the yield curve still wary of a downturn. Meanwhile, stocks are taking a hit. The S&P 500 is down 0.7 percent over the past five days, and the NASDAQ is down 1.5 percent. Lucas: Tech is especially sensitive to rate hike expectations because those companies' valuations are heavily discounted off future cash flows. Higher rates compress those multiples. So it makes sense that the NASDAQ is leading to the downside. Luna: And the VIX? It's sitting at 18.70 — not exactly panic territory, but it's elevated. The VVIX, which measures volatility of volatility, is at 102.17. That's actually down 2.6 percent in five days, but it's still above 100, which historically indicates options markets are bracing for sharp moves. Lucas: That's a key point. The VIX at 18.70 is modest, but the VVIX above 100 tells us that traders are hedging against tail risks. They're buying protection on the volatility itself. That's a sign of nervousness beneath the surface. Luna: So let's tie it together: oil at $100, GDP growth picking up, bond yields rising, and the options market pricing in a volatility regime shift. The market is essentially daring the Fed to hike. Lucas: And the Fed has a dilemma. If they hike, they risk slowing the economy too much — especially if oil stays high and acts as a tax on consumers. If they don't hike, they risk letting inflation expectations become unanchored. It's a classic central banker's nightmare. Luna: And this is exactly the kind of environment where the show we do every day becomes helpful. If our conversations have helped you think about a decision differently — whether it's how to position a portfolio or just understand what the Fed might do next — it's worth knowing that this show is supported directly by listeners. Lucas: Yeah, no ads, no sponsors. It's just us and the audience. So if you find value in these daily deep dives, the best way to keep them going is to chip in at buy me a coffee dot com slash fexingo. That's one word, all lowercase. Luna: And we mean it when we say we appreciate it. Every contribution helps us keep the research sharp and the episodes ad-free. So thank you. Lucas: Alright, back to the oil story. So one thing I want to look at is historical parallels. When was the last time the Fed hiked rates while oil was above $100? Luna: You'd have to go back to 2008, right? Oil hit $145 a barrel in July 2008, and the Fed actually held rates steady at 2 percent because the economy was already crumbling from the financial crisis. They didn't hike into that oil spike. Lucas: Exactly. And in 2011-2014, when oil was above $100, the Fed was in an easing or holding pattern — they didn't start hiking until December 2015, when oil had already collapsed below $40. So this would be a first: hiking into triple-digit oil. Luna: There's also the 2022 precedent. Oil spiked above $120 after Russia invaded Ukraine, and the Fed was already hiking aggressively. But that was a different phase — they were playing catch-up after inflation had already run hot. Now they'd be hiking preemptively. Lucas: Right. So if the Fed does hike in September, it would be a preemptive strike against second-round effects from oil. The risk is that they overdo it and cause a downturn. The market is starting to price that in — the small-cap Russell 2000 is down 0.7 percent in the past five days, and it's still below 3,000. Luna: Small caps are especially vulnerable to higher rates because they have more variable-rate debt and less pricing power. So if the Fed tightens, that index could take a bigger hit. Lucas: And then there's the dollar. A rate hike would strengthen the dollar further, which would ironically help cool oil prices by making dollar-denominated commodities more expensive for other countries. So there's a self-correcting mechanism there. Luna: That's a good point. But it also means emerging markets could come under pressure. A stronger dollar and higher US rates tend to pull capital out of developing economies. Lucas: So the ripple effects are global. Let's keep an eye on the Fed speakers scheduled for this week. If any of them start sounding hawkish, that 18 percent probability could jump quickly. Luna: And we'll be watching the oil inventory data on Wednesday. If crude stocks draw again, that's another upward push for prices. Lucas: Bottom line: the narrative has shifted. The market is no longer pricing in a rosy soft landing with rate cuts. It's pricing in a potential re-acceleration of inflation and a hawkish Fed response. That's a very different environment for investors. Luna: And it's the kind of environment where being nimble matters. Whether that means adjusting duration in your bond portfolio or hedging equity exposure with options. Lucas: For sure. We'll keep tracking the data and bring you what changes. Thanks for listening, and we'll be back tomorrow with another episode.