Hot CPI data roils markets as Fed rate hike bets surge

Markets:

• WTI crude rose 98 cents, reaching $95.12
• US 10-year yields slipped 2.3 basis points to 5.19%
• Gold fell $54 to $4103
• The US dollar led, while the British pound lagged
• The S&P 500 dropped 1.2%

The US CPI report intensified the debate over an October rate increase just as the Federal Reserve nears its quiet period. Market probabilities now stand at 37%, after briefly exceeding 50% following the CPI release, which came in hot across all categories. The data contained no major caveats, coming in generally 0.1 percentage point above expectations. Late in the day, comments from Goolsbee appeared to push back against a hike this month, stating that "more bad months would be unacceptable." However, with CPI having exceeded its target for five years, the question arises of how many bad months have already occurred. In any case, the Fed chair speaks late on Thursday, which will be a key event.

As for market reactions, a US dollar rally, stock declines (which took some time to materialize), and drops in precious metals (silver fell 6%) came as no surprise. What did surprise was the bond market: Treasury yields initially surged much higher, only to fade and then reverse later. US 2-year yields rose as high as 4.95% before finishing at 4.81%, indicating that the market does not anticipate a major FOMC repricing. Further along the curve, yields ended the day lower, suggesting concerns about over-tightening.

The CPI report did not occur in isolation, and the AI trade continues to dominate markets. Tech stocks were hit hard by fresh concerns about excessive spending and profitability. Notably, the bond market is driving some of these worries, as Oracle's borrowing costs and credit default swaps rise. Another report highlights that CoreWeave yields are approaching 15%, dragging down neocloud stocks.