Ludovic Subran, chief investment officer and chief economist at Allianz, said he was not surprised by the latest US inflation print and that markets are underestimating a second inflation shock. He pointed to energy pass-through including diesel refining, food inflation and AI-related inflation, and said markets are now pricing three Fed hikes. Chicago Fed President Austan Goolsbee called the report "distressing" and said officials will have to deal with price pressures.
The consumer price index rose 0.4% in October from September, more than a Dow Jones consensus estimate of a 0.3% increase. CME Group's FedWatch tool shows an 11% chance of a 50 basis-point hike in December, up from zero a week ago, and expectations for a quarter-point increase stand at 88%, up from 77%. The benchmark 10-year Treasury yield rose nearly 10 basis points to 4.95%.
Goldman Sachs now expects 25 basis-point Fed hikes in December 2026 and March 2027, adding a third hike to the cycle after a third straight month of hot inflation, and has pushed its first rate cut to December 2027. The bank says the March move could come in January but March is slightly more likely, and it expects most FOMC members to signal a third hike in the December dot plot. It still sees inflation meaningfully lower by end-2027 as tariff, energy and AI pressures fade.
Hotter-than-expected CPI data sent the Nasdaq Composite down 0.7% and the S&P 500 down 0.4%, and lifted the 10-year Treasury yield by over 10 basis points back toward the 5.00% area. CME Fed funds futures price a 91% chance of a 25 basis-point December tightening and a 9% chance of a 50 basis-point hike. Nvidia fell 5.5% and is now down over 30% from its October highs, while CoreWeave rose 5.6% after its results.
A rebound in artificial-intelligence stocks lifted the US market on Wednesday, with the S&P 500 up 0.9% and the Nasdaq composite up 1.4%, while the Dow Jones Industrial Average was down 56 points, or 0.1%, as of 9:35 a.m. Eastern time. CoreWeave, which rents out access to AI chips over the cloud, leaped 10.7% after reporting a smaller quarterly loss than analysts expected. CEO Michael Intrator said the company has roughly $9 billion in customer prepayments and deposits expected in the next three months, which some analysts said showed progress toward being able to self-fund its business.
Federal Reserve Bank of Philadelphia President Anna Paulson said on Tuesday that further interest rate increases would be needed to bring inflation back to the central bank's 2% target, according to Reuters. She said a gradual approach to rate increases would allow the economy to adjust to higher borrowing costs while giving policymakers time to assess the impact of their decisions, and said underlying inflation is holding between 2.5% and 3%. Paulson, who has a voting position on the Federal Open Market Committee this year, pointed to the resilience of the US economy and stability in the labour market.
UBS expects the Federal Reserve to raise rates by 25 basis points in December and again in March, seeing limited FOMC support for a 50 basis point move even after hot October CPI, and flags the risk of faster tightening. US October CPI rose 0.4% month-on-month against a forecast of 0.3%, and core CPI rose 0.3% against a forecast of 0.2%. Fed funds futures price about 28 basis points of hikes for December, while the 10-year Treasury yield rose 11 basis points to close to 5% and the S&P 500 fell 0.4% on Tuesday.
Core consumer prices rose 0.3% from a month earlier, topping estimates for a third straight month, while overall prices jumped 0.4%, according to Bureau of Labor Statistics data. The S&P 500 halted back-to-back gains and two-year Treasury yields jumped 18 basis points to 4.74%. Fed Governor Christopher Waller said he backed a December rate hike and would support a half-percentage-point increase if inflation keeps accelerating, while Dallas Fed President Lorie Logan said she still sees the need for at least two quarter-point increases.
Dallas Fed President Lorie Logan said it is clear the Fed needs at least two more quarter-percentage-point rate increases, and that it may be possible to raise rates more rapidly this winter than the central bank has moved so far. She said that after two more hikes it would make sense to pause and assess what further action may be appropriate, and that the Fed policy rate is at least 50 basis points below a modestly restrictive level. She also said excess inflation is unacceptable and that higher-than-expected CPI raises concern that PCE inflation could rise.
