On a Wednesday when global bonds were sold and the dollar held firm, a single inflation number reminded markets how fragile their hopes of easing had become. US core prices rose faster than expected in October, and in the wake of that reading, investors began to imagine a Federal Reserve that might move not by a modest quarter-point but by a bolder half-point at its December meeting. It is a familiar human tension, the weighing of patience against the fear of letting prices run, now playing out in the rising yields of the world's most watched debt.
Hot US Inflation Sends Bonds Lower and the Dollar Higher as Markets Weigh a Larger Fed Rate Hike
A quarter-point is locked in; the question is whether it becomes half.
Mark
Why did one-tenth of a percentage point in monthly core inflation move markets so much?
Mimi
Because Waller had named it in advance. He said a 0.3% core reading would make him consider a 50-basis-point hike in December, and the number came in at 0.3% against a 0.2% forecast.
Mark
So the market reacted to a stated threshold, not just the data.
Mimi
Largely, yes. Two-year Treasury yields jumped 18 basis points overnight, and bonds in Japan and Australia sold off too.
Luke
But let's be careful about what that implies. Futures put the chance of a 50 bp hike at only about 10%. The market is not predicting it.
Mimi
Right. A quarter-point is essentially priced in, and three quarter-point moves by mid-next year.
Mark
And the Fed officials aren't united?
Mimi
Logan wants two more hikes, possibly quickly. Goolsbee sees a real inflation issue. Paulson wants gradual increases.
Luke
Waller said he'd consider 50, not that he'd vote for it. And Goldman's Mericle expects 25 in December because most voters would hesitate. That's one bank's forecast, not a decision.
Mark
What about stocks and gold?
Mimi
Asia-Pacific shares edged up 0.2%, while gold fell 2.6% overnight on the stronger dollar.
Luke
The $3,900 gold target is TD Securities' view, and the story doesn't say how the Anthropic listing or Nvidia's troubles tie to rates. Those are context, not proven links.
Le Pouls
- Core US inflation came in at 0.3% against a 0.2% forecast, and bond markets reacted at once.
- Two-year Treasury yields jumped 18 basis points overnight, the sharpest sign of a shifting rate outlook.
- Fed officials are divided, with Waller open to a 50bp hike while Paulson urges gradual steps.
- Traders now see a quarter-point hike in December as nearly certain, with a larger move a long shot but no longer dismissed.
- The Australian dollar slid nearly 0.9% and gold dropped sharply before steadying, leaving markets braced for the December meeting.
On a Wednesday when global bonds were sold and the dollar held firm, a single inflation number reminded markets how fragile their hopes of easing had become. US core prices rose faster than expected in October, and in the wake of that reading, investors began to imagine a Federal Reserve that might move not by a modest quarter-point but by a bolder half-point at its December meeting. It is a familiar human tension, the weighing of patience against the fear of letting prices run, now playing out in the rising yields of the world's most watched debt.
Global bond markets sold off on Wednesday after US inflation came in hotter than expected, and the dollar held its gains as traders began to ask whether the Federal Reserve might raise rates by half a point next month rather than a quarter. Stocks, for the most part, kept their footing.
The trigger was October's data, which showed core inflation rising 0.3% against a forecast of 0.2%. The figure carried extra weight because Fed Governor Christopher Waller had said beforehand that such a reading would lead him to consider a 50-basis-point hike in December.
Other officials added to the hawkish mood. Dallas Fed President Lorie Logan called for two more rate rises, while Chicago's Austan Goolsbee warned of a real inflation problem. Philadelphia's Anna Paulson preferred gradual increases to a sharp jump.
The bond market moved hard. Two-year yields surged 18 basis points overnight, and the selling spread across Asia. The dollar gained against its peers, the Australian dollar fell nearly 0.9% as traders bet the Reserve Bank of Australia was done tightening, and gold slid 2.6% before partly recovering.
Equities held up. Asian shares edged higher, and SoftBank fell after a large quarterly loss tied to data centre spending. Nvidia remained under pressure amid a political storm, while Anthropic pushed ahead with a listing at a $1.4 trillion valuation, a test of faith in the AI boom. Oil rebounded on hopes that the Iran war might be resolved soon. The next marker is the December Fed meeting, and whether the case for a 50bp move gains support.
Global bond markets sold off on Wednesday after a hotter-than-expected US inflation reading, and the dollar held its gains as traders began to weigh whether the Federal Reserve might raise rates by half a point next month rather than a quarter. Stocks, for the most part, kept their footing.
The trigger was the October data. US core inflation ran at a monthly rate of 0.3%, against a forecast of 0.2%. The number mattered more than usual because of what Fed Governor Christopher Waller had said before it was released: that a core reading of 0.3% would lead him to consider a 50-basis-point hike at the December meeting.
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" at hand. Philadelphia Fed President Anna Paulson, by contrast, called for gradual increases rather than a sharp jump.
Fed funds futures reflect that mix. A quarter-point move in December is now seen as essentially locked in, with about a 10% probability of a 50 bp rise. Three quarter-point moves are fully priced in by the middle of next year. Goldman's chief US economist, David Mericle, said the bank still expects a second 25bp hike in December because most FOMC voters would likely hesitate to leap to 50bp. But Goldman is adding a third 25bp hike in March 2027, which would take the funds rate to a peak of 4.25-4.5%.
The move in Treasuries was sharp. Two-year yields surged 18 basis points overnight and rose another 2 bps in Asia to 4.7482%. The 10-year yield, up 12 bps overnight, added 1 bp to 4.9958%. The selling spread across Asia: Japan's 10-year government bond yield rose 7 bps to 2.755%, and Australia's climbed 6 bps to 5.05%.
The dollar gained 0.5% overnight against its major peers and edged up another 0.1% on Wednesday to 102.29. The Australian dollar took the worst of it, dropping nearly 0.9% as traders bet that the Reserve Bank of Australia, after five rate rises this year, is done tightening, with cuts expected next year. Gold fell 2.6% overnight before recovering 0.2% to $4,030.56 an ounce. TD Securities analysts said higher yields, elevated carry costs, a firmer greenback and possible liquidity challenges make a drop toward technical support near $3,900 an ounce likely.
Equities were mixed but resilient. MSCI's broadest index of Asia-Pacific shares rose 0.2% despite weakness on Wall Street, and Japan's Nikkei gained 0.6%. South Korea's KOSPI rose 0.4%, while China's blue chips lost 0.2%. SoftBank Group slid 3.3% after reporting a $7 billion net loss for the second quarter, weighed down by heavy buildout costs for US data centres. Nasdaq futures rose 0.5%, S&P 500 futures 0.2% and European stock futures 0.6%.
Two stories sat in the background. Nvidia remained at the centre of a political storm as the company looks into whether CEO Jensen Huang was targeted by a foreign intelligence operation; its shares fell 5.5% overnight, leaving them 30% below their recent peak. And Anthropic is pressing ahead with its listing at a $1.4 trillion valuation, a test of Wall Street's faith in the AI boom. The offer period runs until Tuesday, with trading expected to start next Thursday.
Oil rebounded after two days of losses, on hopes that the Iran war could be resolved soon following the Democrats' victory in the US midterms. Brent crude rose 0.7% to $92.16 a barrel after dipping as low as $89.16 overnight. The next marker is the December Fed meeting, and whether the case for 50 bp gains more support.
Citations marquantes
Most FOMC voters would hesitate to jump to a 50bp hike, so Goldman still expects 25bp in December, with a third 25bp hike added for March 2027.— David Mericle, chief US economist at Goldman
There is a real inflation issue on hand.— Austan Goolsbee, Chicago Fed President
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