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US inflation was hotter than expected yesterday. September headline CPI rose by 0.6% month-on-month, lifting annual inflation from 3.4% to 3.7%, above the expected 3.6%. More importantly for Fed policy, core CPI increased by 0.3% monthly against a 0.2% forecast, taking its annual rate to 2.6% rather than the expected 2.5%. The surprise was therefore not confined to higher energy prices.
The Fed report initially sharply increased expectations of an October Fed hike—but the repricing has partly reversed. The implied probability of a 0.25% increase at the 27–28 October meeting briefly rose above 50%, from approximately 22% before the release. By today’s Asian session, it had fallen back to 33%. An October hold remains the more likely outcome, but the inflation report has made another immediate hike a much more credible possibility.
Fed Vice Chair for Supervision Michelle Bowman and San Francisco Fed President Mary Daly indicated that policymakers could wait for a clearer picture before deciding whether to hike again. Their remarks helped reduce October tightening expectations and reverse some of the initial Dollar and yield gains. This is an important distinction: yesterday’s CPI was hawkish, but it did not produce an unqualified signal that the Fed will act this month.
US stock markets fell sharply on the inflation print, led lower by technology shares. The S&P 500 lost 1.11%, the Nasdaq Composite declined by 1.88%, but the Dow Jones Industrial Average slipped only 0.09%. The disparity between the Dow and Nasdaq shows that the selloff remains particularly severe in the AI and technology trades.
Asian equities are extending the technology selloff today. Chipmakers and other companies exposed to the AI supply chain are bearing the brunt of the decline.
The US Dollar initially reached a fresh 18-month high, then retreated. The inflation surprise lifted the greenback yesterday, but cautious Fed remarks and falling Treasury yields have weakened it during today’s Asian session. EUR/USD has recovered to trade above 1.1200, while USD/JPY has eased towards 157.90. The longer-term Dollar bullish trend remains intact, however.
Treasury yields also reversed their initial surge. The US 10-year yield jumped towards 5.30% after CPI, but has since fallen towards 5.11%–5.14%, with safe-haven demand for government bonds contributing to the reversal. This is especially notable while stocks remain weak: the equity selloff is no longer simply a reaction to continuously rising yields.
Bitcoin’s bullish consolidation is under strong and renewed pressure as it trades very close to the psychological level at $80,000. A sustained recovery above that level would help preserve the consolidation; a daily close below it would end the case for an eventual breakout above $87,293 for most trend traders, at least not for the near term.
Gold is recovering after yesterday’s sharp fall. The metal dropped towards $4,100 as the initial inflation reaction strengthened the Dollar and yields. Today’s Treasury rally is offering some relief, but a convincing recovery above $4,200 would still be needed to improve the short-term technical picture materially. Note that technically, Gold has been trading within a descending price channel since the start of September.
Australian employment data were unexpectedly weak this morning. Employment fell by 39,300 in September, while unemployment remained at a five-year high of 4.7%. Markets consequently increased the probability of an RBA hold in November to nearly 90%, from 66% before the release. This is a clear setback to the case for another near-term Australian rate hike.
There will be a release of US PPI data later today.
UK GDP data released earlier today came in higher than expected, showing a month-on-month increase of 0.1% while a decrease of 0.1% was expected. This gave the British Pound a very small and likely temporary boost.