Market volatility increased following a higher-than-expected US CPI report. Headline inflation accelerated to 0.6% MoM in September, as expected, from 0.4% in August. However, core inflation held at 0.3%, disappointing expectations for a moderation to 0.2%.
The DXY Index initially surged 0.7% to almost 103 before retreating to 102.5, slightly below Monday’s close. The probability of an October Fed hike briefly jumped to 58% before falling back to around 30%. US Treasury yields also reversed their initial spikes. The 10Y yield surged by 14.4 bps to 5.33% before retreating to 5.20%, near its pre-CPI level. The 30Y yield climbed to 5.63% before easing to 5.52%, below Tuesday’s 5.56% close.
San Francisco Fed President Mary Daly echoed New York Fed President John Williams in seeing no urgency for a back-to-back hike at the October 27-28 FOMC Meeting. Meanwhile, President Donald Trump attacked the Fed at an Arizona rally ahead of the November 3 midterm elections, calling it “terrible” for making interest rates artificially high.
The US stock market sell-off persisted. The S&P 500 Index fell 1.1% to 7719, retreating from the 7800 resistance it has struggled to overcome over the past 2-3 months. The tech-heavy Nasdaq Composite Index lost a sharper 1.9% to 26,693. Investors were concerned that higher bond yields were challenging elevated equity valuations. The Fed’s Beige Book reinforced concerns about corporate profit margins being squeezed between rising energy and input costs and weakening pricing power. With inflation eroding household purchasing power, increasingly price-sensitive consumers are resisting further retail price increases.
Political uncertainty added to the headwinds. With midterms approaching, investors are questioning whether the benign assumption that Republicans would lose the House but retain the Senate is correct. Prediction markets now see a growing risk of a Democratic sweep of Congress, raising concerns about tighter regulatory scrutiny, policy gridlock, and the sustainability of elevated equity valuation. The prospect could encourage investors to lock in profits rather than take on excessive risk into year-end.
Overall, the USD’s failure to sustain gains following the upside CPI surprise raises questions about the durability of its rally. The reversal in Treasury yields and in Fed hike expectations suggests that investors are mindful of growth and earnings risks from further tightening. Attention now turns toFed Chair Kevin Warsh’s fireside chat with IMF Managing Director Kristalina Georgieva in Bangkok on Friday, his final scheduled public appearance before the FOMC blackout. Georgieva will likely reiterate that US growth alone cannot resolve its fiscal problems and will call for fiscal consolidation.
Quote of the Day
"You see, I have let these whiskers grow for you, Grace.”
Abraham Lincoln, when he met Bedell in person in February 1861
Today in history
On October 15, 1860, 11-year-old Grace Bedell from Westfield, New York, wrote a famous letter to presidential candidate Abraham Lincoln, advising him to grow a full beard.
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