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Hot October CPI Puts A December Fed Hike In Play
October CPI rose 0.4% against 0.3% expected, and Fed governor Waller's remarks left some traders weighing a 50-basis-point move in December, WSJ reports.
US consumer prices rose 0.4% in October against 0.3% expected, following a 0.6% gain the month before, according to the November 10 release. Core inflation ran 0.3% against 0.2% expected. The CPI index stood at 337.51 against a forecast of 337.02. Treasury yields rose in Asian trade on Thursday, WSJ reports, as expectations of a Fed rate increase remained strong. The inflation question has flipped from when cuts arrive to how large the next increase will be.
The mechanism was a data surprise followed by a Fed voice. Higher-than-expected inflation and remarks from governor Christopher Waller supported the prospect of a December hike, WSJ reports, with some participants expecting 50 basis points. The euro fell to an 18-month low against the dollar on the news. The dollar's strength is a rate-differential story: a Fed more likely to tighten pulls capital toward dollar assets and away from the euro.
The old shortcut for reading the bond market has stopped working. MarketWatch reports that the tight relationship between oil prices and Treasury yields has broken down, and falling oil is no longer enough to bring down borrowing costs. Barron's makes the same point: inflation does not need energy to accelerate. If price pressure now sits in non-energy categories, lower crude helps headline CPI without easing the core measure the Fed watches. That limits what the Iran diplomacy can do for rates.
The skeptical read is that the numbers are close. A CPI miss of 0.1 point is within the range of ordinary noise, and the core miss was also 0.1. What matters is the run: 0.6% in September and 0.4% in October is a persistent pattern. We hold no yield levels or fed funds futures prices, so we cannot state how much of a hike is priced. The 50-basis-point talk is attributed to unnamed participants and should be treated as a tail scenario.
The calendar offers the next checks. Fresh inflation and housing data arrive this morning, per CNBC. The December Fed meeting is the decision point, and Waller's remarks are the best guide to the committee's lean. Weekly mortgage and crude inventory data, plus any further Fed speakers, will test whether the hawkish read is spreading beyond a single governor. Bond markets reopened after Veterans Day, so Thursday's moves are the first full-market response to the CPI print.
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Oil And Treasury Yields Part Ways
MarketWatch reports that the tight trading relationship between oil prices and Treasury yields has broken down. For years a fall in crude eased inflation expectations and pulled yields lower. That link has lapsed, a sign that inflation concerns now extend beyond the energy complex. Oil fell on Thursday as investors weighed US-Iran diplomacy, per WSJ, yet Treasury yields rose.
The practical consequence is for anyone hoping peace in the Gulf would relieve the bond market. Barron's argues falling gas prices will not solve the inflation problem, because inflation can accelerate without help from energy. A separate datapoint is awkward: the API crude stock change was a build of 9 against an expected draw of 1, with the prior week at a draw of 5.267. More supply plus lower oil prices still leave the yield question unresolved.
Euro At An 18-Month Low
The euro fell to an 18-month low against the dollar on Wednesday, according to WSJ. The drivers were higher-than-expected US inflation and Waller's remarks supporting a December Fed hike, with some participants expecting 50 basis points. A currency at an 18-month low is a direct readout of the rate gap: the market is paying for dollar yield and selling the euro to fund it.
Europe's equities moved in the opposite direction. The STOXX 600 hit a record on strong earnings and easing Mideast tensions, per Reuters. A weak euro and a record equity index can coexist if earnings are strong, and the data we hold does not explain the link. Munich Re's profit decline in the third quarter, reported by WSJ, shows that results across the region were not uniformly strong.
Mortgage Rates Ease, Barely
The MBA 30-year mortgage rate for the week ending November 6 was 7.21%, down from 7.3% the week before. A 9-basis-point decline is welcome news for buyers, but it still leaves the borrowing cost above 7%. The reading predates Tuesday's hot CPI print and Thursday's rise in Treasury yields, so it is already stale as a guide to where rates are headed.
Mortgage rates track long-term Treasury yields, and yields are moving up on Fed hike expectations. That points to the next weekly reading giving back the improvement. The housing data due this morning, per CNBC, will show how buyers responded to a rate near 7.3%. Barron's frames the stock market's problem as inflation worries putting Fed hikes back on the front burner, which is also the housing market's problem.
China Keeps Its Foot On The Pedal
The People's Bank of China reiterated its commitment to a pro-growth, accommodative policy stance on November 11, WSJ reports, while again stating concern about the risk of too-low inflation. That is the opposite of the Fed's position. One central bank is worried about prices that are too low and the other is weighing a 50-basis-point increase because they are too high.
The divergence matters for currency and capital flows. A Fed leaning toward hikes and a PBOC staying accommodative widens the rate gap that favors the dollar. WSJ's headline says the bank is signaling easing restraint as growth holds up, so the stimulus is not accelerating. SMIC's record revenue, reported on November 12, is one sign the economy is receiving support from the AI cycle.
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