Headline CPI rose 0.4% month-on-month, with core CPI up 0.3%—both exceeding market expectations.
2-year Treasury yield hit 4.71% intraday; markets focus on Fed Governor Waller's remarks regarding a potential 50-basis-point hike.
US Treasury yields climbed as October consumer prices came in higher than market expectations. While the surge in energy prices has moderated, the core inflation rate remained unchanged for the third consecutive month. With the Federal Reserve's December rate hike now appearing more likely, concerns have intensified regarding the potential magnitude of the increase.
According to the US Bureau of Labor Statistics (BLS) on the 10th (local time), the Consumer Price Index (CPI) rose 0.4% month-on-month on a seasonally adjusted basis. While this is lower than the 0.6% increase recorded in September, it surpassed the 0.3% market consensus compiled by Reuters. Core CPI, which excludes food and energy, also rose 0.3%, exceeding the 0.2% forecast.
This report did not include year-on-year comparisons for headline or core CPI, as data collection was disrupted by the federal government shutdown in October of the previous year. Estimates provided by some institutions are not official BLS statistics.
The moderation in headline CPI was driven by a slowdown in energy price growth, which decelerated significantly from 5.2% in September to 0.7% in October. Inflation in services excluding housing and energy also dipped from 0.4% to 0.3%. Conversely, food prices rebounded from flat growth to a 0.5% increase, and transportation services rose from 0.6% to 0.8%.
Despite a 1.2% decline in used car prices, core CPI remained at 0.3%, suggesting that price drops in select categories were insufficient to curb the pace of core inflation. However, the price increase for goods excluding food and energy slowed from 0.3% to 0.2%, making it difficult to interpret these results as a broad-based re-acceleration of inflation.
In the bond market, Treasury yields rose. According to the Financial Times, the 2-year US Treasury yield, which is sensitive to monetary policy outlooks, climbed to 4.71% intraday following the CPI release. The 10-year yield reached 4.940% at 10:38 PM Korea Standard Time, up 7.7 basis points (1bp=0.01 percentage point) from the previous day's close.
Higher Treasury yields increase financing burdens for corporations and households and can act as a headwind for growth stocks, whose valuations are heavily dependent on expectations of future earnings. According to Reuters, Nasdaq 100 futures fell 0.92% at 10:32 PM KST, two minutes after the CPI announcement.
Upward pressure on interest rates had been building even before the CPI release. Federal Reserve Governor Christopher Waller stated in a previous public address that he would support a 25-basis-point hike in December even if inflation slowed as expected. He noted that if core CPI remained at or above 0.3% month-on-month, a 50-basis-point hike should be considered. The 2-year yield had already risen to the 4.61% range prior to the CPI release, suggesting that both the inflation data and Waller's comments influenced the day's yield movements.
While the actual core CPI increase fell within the range Waller suggested for considering a larger hike, it is premature to view his comments as the consensus of the entire Federal Open Market Committee (FOMC).
The next CPI report for November is scheduled for release on December 10 at 10:30 PM KST, which is after the FOMC meeting held on December 8-9. The Fed will determine year-end interest rates based on this inflation data, Personal Consumption Expenditures (PCE) price indices, and employment indicators. While this CPI report has heightened concerns regarding a December rate hike, the final decision on whether to hike and by how much remains dependent on upcoming economic data and the Fed's assessment.
