〔Overnight Brief〕$105 Oil and PPI Heat Pin 10Y at 4.95%, 30Y at 5.308% Auction; Market Now Prices 70-71% Hike for Next Week — CPI Tonight Decides

0. The Overnight Arc

• **[ONGOING] Stagflation cross-currents sharpen ^[1][2][3].** Brent crude pierced $105/barrel on escalating US-Iran tensions ^[2], August PPI accelerated to +0.4% m/m from +0.1% with the y/y at +5.4% — a three-month high ^[2][3] — and the 10-year Treasury yield pushed to 4.94-4.95%, its highest level since October 2023 ^[1][4][5]. The $22B 30-year reopening cleared at 5.308% against a 5.335% when-issued yield, with an implied ~5.35% above the median stop-out for any 30-year auction since 2001 ^[6][7]. Traders lifted the implied probability of a hike at next week's FOMC (Sept 15-16) to roughly 70-71% ^[7][8]. The move was led by supply — oil and a $5.187B Treasury buyback that undershot its $6B ceiling ^[4] — not by a demand-side signal from the Fed. Friday's August CPI, due tonight, is the final input ^[9][8][10].

1. The Inflation Pulse

• **[NEW] August PPI, headline hot, core soft.** Headline PPI rose +0.4% m/m, double July's +0.1%, with the y/y at +5.4% — the largest three-month gain ^[2][3]. Core PPI came in at +0.2% m/m against +0.3% expected ^[11]. Energy is doing the work; the medical services and airline ticket components feed directly into the PCE calculation, the Fed's preferred gauge ^[3].
• **[NEW] Source quality flag.** Item ^[11] reports headline PPI y/y as "2.4% above 5.3% expected" — internally inconsistent and at odds with ^[2][3], which agree on +5.4% y/y. Treat headline y/y as +5.4% from the corroborated sources.
• **[NEW] Oil shock layer.** Brent settled near $105, with no sign of energy-price relief ^[2]. BMO Chief FX Strategist Mark McCormick: higher oil "signals continued inflationary pressure in coming months," and the market is "underestimating inflation levels and their impact on rates, dollar strength and investor risk appetite" ^[2].

2. The Long End Bites

• **[ESCALATED] 10-year at 4.94-4.95%.** Highest since October 2023, when 10s briefly hit 5.006% ^[1]. Yields were slightly LOWER in the overnight session; two waves did the damage — overnight oil through $100, then PPI's internal components ^[1][12]. Mortgage News Daily's MBS complex lost nearly a full point by 4pm ET, with 10s +11.4bps on the day ^[1].
• **[ESCALATED] 30-year at 5.308% auction, near 2007 highs.** The 30Y yield "rose to its highest level since 2007" intraday; the reopening cleared at 5.308% vs 5.335% when-issued, an inside stop but at the highest absolute yield since the 2007-era issuance cycle ^[6][7].
• **[NEW] 2-year through 4.5%.** Two-year yield rose 10bps to 4.53%, the first break above 4.5% since 2024 ^[13][7].
• **[NEW] Mortgage transmission.** The 30-year fixed mortgage rate jumped to 7.07%, with the average lender moving up 0.125% in a single day; Freddie Mac's 6.76% weekly survey lags the cash market by several days ^[14].
• **[NEW] Buyback undershoots.** The Treasury's $5.187B 10-20Y liquidity buyback filled 86% of the announced $6B ceiling; Bloomberg cited Deutsche Bank strategist Steven Zeng calling the three-times-larger cap a "snowball" that has not stopped the selling ^[4].

3. The Mechanism Split: Supply vs. Demand

• **[ESCALATED] Warsh sets the hawkish baseline.** Fed Chair Kevin Warsh's August 28 Jackson Hole speech set the tone: recent inflation data has "not told me that the underlying trend has materially improved," and "we have more work to do" ^[15]. The August nonfarm payrolls of +162k — well above the 50-55k consensus — reinforced the hawkish case ^[15][16].
• **[NEW] The supply counter.** Multiple officials and strategists argue the inflation pulse is supply-driven (oil, Treasury issuance, fiscal deficit), not demand-driven, and a rate hike would not address it ^[15][10]. Fed officials have signaled the main policy tool "will do little to restrain some of the forces pushing up prices now" ^[10].
• **[NEW] Data reliability question.** History suggests BLS payrolls are systematically overstated, and the monthly inflation trend is cooling, weakening the hawkish case even before tonight's CPI ^[15].

4. The Repricing and What Decides Tonight

• **[NEW] Hike odds cluster at 70-71%.** Item ^[7] cites ~70% for next week and a fully priced October; ^[8] cites 71% on the eve of CPI; ^[15] cites ~60% from fed funds futures on Sept 10 morning; ^[16] cites >60% after the payrolls beat. Direction is up; the spread reflects timing ^{[7][15][8][16]}.
• **[NEW] 2027 path.** Fed funds futures also price ~36% probability of two cumulative hikes by mid-March 2027 ^[15].
• **[NEW] Cross-asset read.** Bloomberg Dollar Spot Index gained 0.4% — the biggest jump since August 28 ^[2]. Spot gold eased to $4,342/oz ^[17]. US money market fund assets fell to $7.97 trillion ^[18]. Fed RRP usage rose to $4.736B from $432M the prior session ^[19].
• **[ONGOING] Tonight's CPI is the gate.** August CPI is due Friday, ahead of the Sept 15-16 FOMC; a hot print would lock in the 70% hike, a soft print would reopen the dissent ^[9][8][10]. PPI's medical and airline components are already in traders' PCE models, but PCE forecasts remain "highly uncertain" until CPI is in hand ^[3].