With futures pricing slightly more than a full quarter-point hike for December, the 50bp debate is now a tail risk the market will react to on any Fed speaker headline. Treasury yields close to 5% keep the dollar supported, including against the yen ahead of the Bank of Japan’s own expected December hike, which leaves the US-Japan rate gap a key driver of USD/JPY. Higher real yields are also a headwind for gold, which has tended to trade on Fed hike expectations rather than as a safe haven this year. For equities, the combination of firmer inflation and rising long-end yields adds pressure to richly valued tech shares, which are already dealing with the Nvidia leadership shock.
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October’s inflation report makes a December Fed hike look all but certain, and UBS thinks the real risk is a faster run of quarter-point moves rather than one big step.
Summary:
- US October CPI rose 0.4% m/m (forecast 0.3%) and core rose 0.3% (forecast 0.2%), with broad price gains
- The 10-year Treasury yield rose 11bp to close to 5% and the S&P 500 fell 0.4% on Tuesday
- Fed Governor Waller said before the data that core at 0.3% or more could warrant considering a 50bp December hike, and Dallas Fed President Logan favors at least two more 25bp hikes
- Fed funds futures price about 28bp of hikes for December
- UBS sees limited FOMC support for 50bp and keeps its base case of 25bp hikes in December and March
- Three-month annualized core inflation rose to about 3.75%, and tariff-sensitive and IT goods prices stayed firm
A hotter than expected US inflation report has put an unusual question in front of the Federal Reserve: whether its next hike should be a double-sized one. UBS thinks the answer is still no. But the bank says October’s data strengthen the case for at least two more quarter-point increases and raise the risk that they come faster.
Headline consumer prices rose 0.4% in October, above the 0.3% forecast. Core prices, which exclude food and energy, rose 0.3% against expectations of 0.2%. Price gains were broad, covering food, housing, recreation, medical care, electricity, airfares and delivery services. The 10-year Treasury yield jumped 11 basis points to close to 5%, and the S&P 500 fell 0.4% on Tuesday.
The 50 basis point idea came from Fed Governor Christopher Waller. Before the release, he said a core reading of around 0.3% or more could justify considering a half-point move in December.
Separately, Dallas Fed President Lorie Logan said she favors at least two more quarter-point hikes and suggested the Fed could move more quickly this winter.
Fed funds futures now price about 28 basis points of tightening for December. That implies a full quarter-point hike and only a small chance of something larger.
UBS argues that appetite on the rate-setting committee for a 50 basis point move is limited. The bank said a hike of that size could signal that policy is well below where it needs to be and make the tightening cycle look open-ended. Its base case remains quarter-point hikes in December and March.
The detail behind the headline numbers explains the concern. Monthly core inflation edged down to 0.30% from 0.33%, but the three-month annualized pace rose to about 3.75%, from below 2% as recently as August. Excluding used cars, which fell 1.2%, core goods prices rose around 0.4%. Tariff-sensitive items such as toys, furniture and bedding, and appliances each rose more than 1%, and IT hardware prices climbed 0.4%. UBS noted that those categories carry larger weights in the Fed’s preferred PCE gauge than in CPI. It said goods disinflation looks a less reliable theme heading into 2027.
Shelter inflation slowed to 0.30% from 0.39% but remains sticky. Energy rose a further 0.7%, although its contribution to the headline figure faded. After two disappointing reports in a row, the December debate is now about the size of the move, not whether one comes.
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Its been a long year, final FOMC meeting coming up in 3 weeks:
This article was written by Eamonn Sheridan at investinglive.com.