Inflation came in softer. Yields rose anyway.

A three-tenths undershoot on both the headline and core measures of the Federal Reserve’s preferred inflation gauge, accompanied by a downward revision to the previous month, is a genuinely encouraging set of numbers. The bond market’s refusal to treat it as one is the thing worth understanding. Two explanations are available and we cannot adjudicate between them from here. The first is mechanical: August data describes a month that ended before the recent move in energy prices, so a soft print says little about what the autumn holds. The second is about credibility: a committee in which sixteen of eighteen participants expect to raise rates again has told the market where it is going, and a single better-than-expected backward-looking print does not change that. Either way, the practical consequence for a reader is the same. The 10-year at 5.29% has now risen through a rate decision, a geopolitical escalation and a soft inflation report, which suggests the level is being set by something more durable than the week’s headlines.

• PCE undershot on both measures — by three tenths of a point each, with July revised down.
• The 10-year still rose — to 5.29%, up four hundredths of a point.
• The quarter closed higher — the S&P up 2% and the Nasdaq up 2.5% over Q3.

Equity figures are Wednesday 30 Sep’s close and the quarter and month to that date. Every figure shown is one a named source states directly. Commodity levels are reported exactly as quoted by the source on the date shown; benchmark quotes at month-end can reflect a change in the front-month contract. Single names appear as news, not recommendations. Times GST.

The third quarter ends with the central regional question exactly where it was in July: unresolved. Iran’s proposal to reopen the Strait of Hormuz within seven days — conditional on an end to what Tehran describes as US acts of aggression, the lifting of the naval blockade and of economic warfare, and the release of Iranian assets — was rejected, with the US ambassador to the United Nations describing it as “a pretty cynical attempt” to end the war. Both sides have since said they expect contacts to continue, without saying when. The Salalah ministerial that was to have brought Iran and the six GCC states together has no new date. Against that, the physical picture has improved over the quarter: the East–West pipeline that was struck in September has been repaired and reopened, and cargoes have continued to move through overland and offshore routes.

The Energy Department’s request for proposals for an exchange of up to 40 million barrels closes on 6 October, with deliveries scheduled for November and December. That is the next dated item on the regional energy calendar, and the level of interest it attracts will say something about how tight physical supply actually is.

Vault Wealth’s read

This section sets out how we are interpreting events. It is commentary, not guidance, and nothing here is a recommendation to buy, sell or hold anything.

1. 01The quarter rewarded patience more than conviction. Three months containing a war, a rate rise and multi-decade-high yields produced a 2% gain in the broad index. Readers who spent the quarter reacting to headlines will likely have done worse than the index itself.
2. 02A soft inflation print did not move the long end. That is the single most informative thing about Wednesday. It suggests the level of yields is currently anchored by the Federal Reserve’s stated intentions rather than by incoming data, which makes individual releases less useful as signals than they were six months ago.
3. 03August data cannot see the autumn. The PCE report describes a month that ended before the recent energy moves. We would treat it as encouraging rather than conclusive, and we have been caught out before by assuming a backward-looking print settles a forward-looking question.
4. 04What would genuinely change the picture. Normal commercial transit through the strait, a verified ceasefire, or a sustained fall in the long end of the US curve. None of those happened in the third quarter.

How any of this bears on an individual portfolio depends on circumstances we cannot see from here — time horizon, currency exposure, liquidity needs and existing holdings among them. That conversation belongs with a licensed advisor, and we would encourage clients with questions about the themes above to have it.