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*                       FIEND'S SUPERBEAR MARKET REPORT                     *

*                                October 19, 2026                           *

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*                       e-mail: fiendbear@fiendbear.com                     *

*                    web address: http://www.fiendbear.com                  *

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Fiend Commentary
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How Hot Is Hot Enough?

Something unusual happened last week.

Inflation got worse.

Technology stocks finally cracked.

Oil moved back above $100.

And Treasury yields fell.

By Friday, the 10-year Treasury yield had retreated to about 5.09%, well below the 5.36% reached only a week earlier. The bond market just enjoyed its strongest week in months even though both CPI and PPI surprised on the upside. Reuters

That would make perfect sense if inflation were collapsing.

It isn't.

Headline CPI accelerated to 3.7%. Producer inflation reached 6.3%. Oil finished Friday with WTI at $101.41 and Brent at $109.86, its highest level since May. Reuters

Yet markets now assign only about a 13% probability of another rate hike in October.

October isn't literally impossible.

It is close enough.

The more interesting question is becoming December.

Twenty-Five Basis Points May Not Age Well

The Fed has raised rates exactly once during this renewed inflation upswing.

Twenty-five basis points.

Markets currently assign roughly an 89% probability of another increase by December, but the consensus remains another quarter point rather than anything more aggressive. Reuters

Perhaps that will be sufficient.

But consider the sequence.

Energy prices surged.

Headline inflation accelerated.

Core inflation came in hotter than expected.

Producer prices jumped.

Freight and transportation costs rose.

Oil remains near $100 even after its latest weekend decline.

And Warsh appears prepared to wait another six weeks before possibly adding another 25 basis points.

This is where gradualism can become falling behind.

The Fed keeps reacting to yesterday's data while inflationary forces move through the economy in real time.

Another quarter point in December might look appropriately cautious today.

It could look very different after another two months of rising prices.

Could December Become Fifty?

A 50-basis-point hike in December is not the market's base case.

It shouldn't be presented as one.

Barclays, for example, currently expects 25 basis points in December followed by another 25 in January. Reuters

But 50 basis points has entered the realm of reasonable discussion.

Suppose October CPI rises again.

PPI remains elevated.

Core PCE moves farther above 3%.

Oil stays around $100-$110.

And employment stabilizes after September's weak report.

At that point Warsh would have spent several months explaining why patience was appropriate while inflation moved farther away from the Fed's 2% target.

A half-point move would then accomplish two things.

It would tighten policy.

More importantly, it would demonstrate that the Fed had noticed the trend.

That second function matters because monetary policy operates partly through credibility.

If businesses become convinced the Fed will always respond to persistent inflation with one cautious quarter point followed by several months of observation, the deterrent effect diminishes.

The Fed doesn't need to become Volcker.

It does need markets to believe there is some inflation number that will make it stop tiptoeing.

We don't yet know what that number is.

The Bond Rally Is Not Necessarily an Inflation Vote

The decline in Treasury yields last week can easily be misread.

It does not necessarily mean bond investors suddenly believe inflation has been defeated.

Part of the rally was simply risk aversion.

Money came out of technology stocks and went into government debt.

That is actually an encouraging development for traditional portfolio relationships. Bonds once again behaved like a hedge when stocks fell, pushing the 10-year down toward 5% from 5.3% despite the ugly inflation numbers. Reuters

The distinction is important.

Falling yields because inflation is improving would be bullish.

Falling yields because investors fear something is breaking is different.

Friday looked more like the second version.

The Nasdaq fell about 2.1%, leaving it down more than 4% for the week. The semiconductor index suffered its eighth consecutive decline, while CoreWeave dropped another 12% Friday and about 25% for the week. Yields on some of CoreWeave's debt climbed above 15%. Reuters

The AI boom has not disappeared.

But the market has finally begun asking how an enormous capital-intensive expansion works when capital itself becomes expensive.

That question becomes even more important if the Fed has considerably more tightening ahead.

Oil Keeps Moving the Goalposts

Oil offered some relief over the weekend.

The administration eased some restrictions on Russian oil and diesel flows, helping WTI retreat to about $100.25 and Brent to roughly $107.88 early Monday. Reuters

That is helpful.

It is not cheap energy.

Middle East shipping disruptions remain severe, and Reuters reports crude flows through the Strait of Hormuz have been dramatically reduced by continuing attacks. Analysts still expect oil to remain around $100-$110 through the midterm elections. Reuters

This is the Fed's biggest wild card.

If oil suddenly falls back toward $80, much of the inflation problem begins solving itself.

Gasoline declines.

Diesel declines.

Freight costs eventually decline.

Headline CPI falls.

Warsh can wait.

If oil remains near $100 or moves higher again, the opposite happens.

The longer energy stays expensive, the harder it becomes to describe the resulting inflation as a temporary shock.

Temporary shocks are supposed to end.

Have We Seen This Movie Before?

This is where the comparison with the inflation episode earlier in the decade becomes uncomfortable.

The mistake then was not that the Fed never acted.

It eventually acted aggressively.

The mistake was waiting too long because policymakers repeatedly believed inflation would moderate without requiring much intervention.

The word was transitory.

Today the language is different.

Energy shock.

Temporary supply effects.

Need more data.

Policy works with a lag.

All legitimate arguments.

But they lead toward the same danger if policymakers consistently interpret uncertainty as a reason to wait.

Inflation does not have to reach 8% or 9% before credibility becomes an issue.

The Fed's target is 2%.

CPI is 3.7%.

PPI is 6.3%.

Consumer inflation expectations have risen.

Oil is around $100.

That doesn't constitute an inflation crisis.

It does constitute a trend moving in the wrong direction.

The longer that persists, the larger the eventual policy response may need to become.

The Weak Economy Is Warsh's Escape Hatch

There is one major reason the Fed may never need that larger response.

The economy could weaken first.

September employment was poor.

Smaller stocks have struggled for weeks.

Housing is already suffering from mortgage rates above 7%.

High gasoline and diesel prices drain discretionary income.

And the recent technology selloff raises the possibility that one of the strongest sources of investment spending begins cooling.

If enough of that combines into a meaningful slowdown, inflation could decline because demand finally breaks.

That would vindicate Warsh's patience.

It would also create the bizarre possibility we discussed earlier this month: September's hike could be followed by one final increase in December, followed sometime in 2027 by renewed talk of cuts.

The Fed would not have conquered inflation through aggressive tightening.

The economy would have done much of the work for it.

That is possible.

But relying on recession to solve inflation is hardly an ideal monetary strategy.

December May Be the Real Crossroads

Monday morning brings a little relief.

Oil is lower.

Treasury yields remain well below their recent peaks.

Gold has rebounded.

Stock futures are higher after last week's technology rout. Reuters

None of that resolves the underlying question.

The Fed is almost certainly going to skip October unless something extraordinary happens before the meeting.

Then the clock starts running toward December.

If inflation stabilizes and oil retreats, another quarter point may be plenty.

If inflation continues accelerating, 25 basis points starts looking increasingly ceremonial.

At some point Warsh will have to decide whether he is trying to prevent inflation from becoming embedded or merely responding after the evidence becomes overwhelming.

So far the Fed has chosen the second approach.

One hike.

Plenty of warnings.

Then wait.

That strategy may work.

But the past week produced the clearest warning yet that inflation isn't waiting with them.

By December the question may no longer be whether the Fed hikes.

It may be whether 25 basis points is already too little, too late.

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