A single tenth of a percentage point in October's core consumer prices, arriving just after a Federal Reserve governor had named that very figure as his trigger, reminded global markets how quickly a number can rearrange expectations. Bonds fell from Washington to Tokyo to Sydney, and the dollar firmed as traders asked whether the central bank's long fight against inflation had further to run. The question now hanging over December is less about whether rates rise than about how far, and that uncertainty is itself a kind of weight that markets must carry.
Bonds Sell Off as Hot US Inflation Revives Fears of Outsized Fed Rate Hike
One tenth of a point, and a Fed governor's line in the sand
Mark
One tenth of a point on core inflation moved bonds around the world. Why did it matter that much?
Mimi
Because Waller had drawn the line in advance. He said 0.3% would make him consider a 50-basis-point hike, and 0.3% is what arrived. Two-year yields jumped 18 basis points overnight.
Mark
So is a half-point hike now the expectation?
Mimi
No. Futures show a quarter-point as essentially locked in and only about a 10% chance of 50.
Luke
That 10% is a market-implied probability, not a Fed decision. And Waller said he would consider it, not that he would vote for it.
Mark
Goldman doesn't expect the bigger move either, right?
Mimi
Right. David Mericle expects 25 in December because most FOMC voters would hesitate to go to 50. But Goldman added a third quarter-point hike in March 2027, peaking at 4.25-4.5%.
Luke
That's one bank's forecast. The officials quoted aren't unanimous on pace either. Logan hinted at speed, while Paulson wanted gradual hikes.
Mark
Why did stocks hold up while bonds sold off?
Mimi
Futures rose: Nasdaq 0.5%, S&P 500 0.2%, Europe 0.6%. The source doesn't say why equities shrugged it off.
Luke
Right, so any explanation would be guesswork. The same goes for gold: TD's $3,900 support call is an analyst view, not a certainty.
El Pulso
- A slightly hot core inflation reading landed exactly on the threshold a Fed governor had warned about, and bond traders reacted instantly.
- Two-year Treasury yields jumped 18 basis points overnight while Japanese and Australian bonds slid in tandem across Asia.
- Fed officials are openly split, with one voice floating a half-point hike while others and Goldman Sachs hold to quarter-point steps.
- The dollar climbed, the Australian dollar slipped as its central bank appears finished tightening, and gold fell toward a possible retreat near $3,900.
- Markets now treat a December quarter-point hike as nearly certain, with three hikes priced by mid-2027, and the next inflation data will decide whether the path stays gradual or steepens.
A single tenth of a percentage point in October's core consumer prices, arriving just after a Federal Reserve governor had named that very figure as his trigger, reminded global markets how quickly a number can rearrange expectations. Bonds fell from Washington to Tokyo to Sydney, and the dollar firmed as traders asked whether the central bank's long fight against inflation had further to run. The question now hanging over December is less about whether rates rise than about how far, and that uncertainty is itself a kind of weight that markets must carry.
Core US consumer prices rose 0.3% in October, a tenth of a point above what forecasters expected. That small gap mattered because a Federal Reserve governor, Christopher Waller, had said just beforehand that a reading of that size would lead him to consider a half-point rate hike in December. The number arrived exactly where he had pointed, and global bond markets sold off on Wednesday.
Other Fed officials sharpened the tone. Lorie Logan argued for two more rate rises, possibly in quick succession, and Austan Goolsbee warned of a real inflation problem. Anna Paulson favored gradual hikes. The reaction was swift: two-year Treasury yields jumped 18 basis points overnight, and the selling carried through Asia, pushing Japanese and Australian government bond yields higher.
Traders now treat a quarter-point increase in December as nearly certain, with only a small chance of a larger move. Goldman Sachs still expects two quarter-point hikes this year and a third in early 2027, reasoning that most policymakers would hesitate to jump to a half-point step. The repricing lifted the dollar and sent the Australian dollar lower, as markets concluded its central bank may be finished after five hikes this year. Gold slipped toward levels analysts see as technical support.
Equities held steady, and oil edged up on hopes that the Iran conflict might ease after the Democrats' midterm victory. Against this backdrop, Anthropic is pressing ahead with a listing at a $1.4 trillion valuation, a test of investor faith in the AI boom. The next inflation readings, and how Fed officials respond to them, will determine whether December brings a quarter-point move or something larger.
Core US consumer prices rose 0.3% in October from the month before, a tenth of a point above the 0.2% forecasters expected. That small miss was enough to send global bond markets lower on Wednesday and keep the dollar firm, because of what a Federal Reserve governor had said just before the number came out.
Fed Governor Christopher Waller had said that a core reading of 0.3% would lead him to consider a 50-basis-point rate hike at the central bank's next meeting in December. The data then landed exactly there. Other Fed officials added to the hawkish tone. Dallas Fed President Lorie Logan said two more rate rises were needed, possibly in quick succession. Chicago Fed President Austan Goolsbee warned of a "real inflation issue." Philadelphia Fed President Anna Paulson called for gradual hikes, a more measured note within the same direction.
The market reaction was sharp. Two-year Treasury yields jumped 18 basis points overnight, and the 10-year yield rose 12 basis points. In Asia on Wednesday they edged up further: the two-year gained 2 basis points to 4.7482%, and the 10-year rose 1 basis point to 4.9958%. The selling spread across the region. Japan's 10-year government bond yield climbed 7 basis points to 2.755%, and Australia's rose 6 basis points to 5.05%.
Fed funds futures now treat a quarter-point increase in December as essentially locked in, with about a 10% probability of a half-point move. Three quarter-point hikes are fully priced in by the middle of next year. Goldman Sachs is not betting on the larger step. Chief US economist David Mericle said the bank still expects a second 25-basis-point hike in December, since most voting FOMC members would likely hesitate to jump to 50. But Goldman is adding a third 25-basis-point hike in March 2027, which would take the funds rate to a peak of 4.25-4.5%.
The repricing lifted the dollar, which gained 0.5% overnight against major peers and added another 0.1% on Wednesday to 102.29. The Australian dollar suffered most, falling nearly 0.9% as traders concluded its central bank is finished tightening after five rate rises this year, with cuts expected next year. Gold fell 2.6% overnight and edged up 0.2% on Wednesday to $4,030.56 an ounce. Analysts at TD Securities said higher yields across the curve, elevated carry costs, a firmer greenback and possible liquidity challenges make a retreat toward technical support near $3,900 an ounce likely.
Equities took it in stride. Nasdaq futures rose 0.5%, S&P 500 futures gained 0.2%, and European stock futures added 0.6%. Oil rebounded after two days of losses on hopes that the Iran war could be resolved soon following the Democrats' victory in the US midterm elections. Brent crude rose 0.7% to $92.16 a barrel, after dropping as low as $89.16 overnight.
Against this backdrop, Anthropic is pressing ahead with its listing at a $1.4 trillion valuation, a test of Wall Street's faith in the AI boom it helped ignite. The offer period runs until Tuesday, with trading expected to start the following Thursday. The next inflation readings, and how Fed officials respond to them, will show whether December brings 25 basis points or 50.
Citas Notables
Despite Waller's comment, we continue to expect a second 25bp rate hike in December because we suspect most FOMC voters would hesitate to jump to a 50bp hike.— David Mericle, chief US economist at Goldman Sachs
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Economy & Finance