October CPI Hotter-Than-Expected

MACRO FRAME

Resilient hiring and persistent core price pressures keep the Fed focused on further tightening even as uncertainty over AI investment clouds the growth outlook.

STOCK INDEX FUTURES

Equity index futures are lower following October’s CPI print, which showed that headline  CPI rose 0.4% in October, above the 0.3% consensus forecasts following September’s 0.6% increase. Core CPI increased 0.3%, also above forecast, for a third consecutive month. The data points to less intense energy-driven inflation without a clear further cooling in the underlying trend. Technology remained a focal point as investors assessed Nvidia-related headlines, Anthropic’s proposed IPO and upcoming CoreWeave earnings. Anthropic’s filing outlined proceeds of as much as $64.4 billion and a fully diluted valuation of up to $1.4 trillion, potentially creating competition for investor capital at a sensitive point in the AI investment cycle. CoreWeave’s results will provide another test of infrastructure demand, financing requirements and the sustainability of debt-funded expansion. Lower oil prices are providing some relief, but strong inflation and employment data support expectations for a December Fed hike, which remains a headwind for valuations.

The post-election outlook remains a balance between potential constraints on data-center development and the prospect of greater spending discipline among large technology companies. Divided government could limit major federal legislative changes, but state and local permitting remain separate sources of uncertainty. Lower valuations may improve the tech sector’s appeal, although the investment case still depends on earnings delivery and the extent to which development delays translate into weaker orders.

CURRENCIES

US DOLLAR: The USD index is 0.34% higher at 102.000. The dollar edged higher before the CPI release, supported by hawkish comments from Fed Governor Christopher Waller. Waller favored a December rate increase even if October inflation moderated and said a half-point move should be considered if the inflation outlook deteriorates. October’s inflation figures offered little evidence of a decisive break in underlying price pressure. Energy inflation moderated sharply, while food and several service categories continued to rise. The report therefore leaves persistent inflation relevant to the dollar’s interest-rate support, even as falling oil prices could improve the outlook for subsequent months. Markets are now fully priced for a December rate hike and see 66 bps of tightening over the next 12 months.

EURO: The euro is 0.31% weaker at $1.1187, pressured by dollar strength. No new data overnight for the euro will leave focus on Eurogroup meetings, US data, and moves in oil. Lower oil prices provide a more favorable backdrop for the euro area, but near-term trading remains sensitive to US rate expectations which have moved in favor of the dollar. The persistence of monthly US core inflation limits the scope for treating the decline in energy prices as a move to favor the euro. Markets assign roughly a 73% probability to a December hike and are fully priced for a rate hike in February. French fiscal concerns remained a potential constraint. The ECB’s hawkish hold and forward guidance has all but guaranteed a rate hike at the bank’s meeting in December. The euro’s upside, however, is likely to be contained by the prospect that December’s rate hike will be followed by a pause.

BRITISH POUND: Sterling fell 0.31% to $1.3397. The Bank of England’s recent tightening continues to provide a domestic counterweight, although relative interest-rate expectations remain important, with today’s inflation data favoring the dollar. Thursday’s UK GDP report is expected to show third-quarter growth of 0.7%, although the lingering squeeze from higher energy costs remains a risk to household spending. The BoE’s increase to 4% and indications that further tightening may happen provide a domestic source of support. Governor Andrew Bailey cautioned that the increase was not necessarily the start of a lengthy hiking cycle, but indicated that another move would likely be needed unless the Middle East conflict is resolved. With markets already anticipating three quarter-point increases next year, sterling remains sensitive to any guidance that tempers those expectations. While the UK economy has shown resilience over recent months, the bank will likely remain cautious against future rate hikes to avoid slowing its fragile growth backdrop.

JAPANESE YEN: The yen is 0.36% weaker at 158.47 yen per dollar. Waller’s comments and expectations for further Fed tightening supported the dollar, while lower oil prices offer the yen some downside protection. Expectations for additional Bank of Japan tightening remain relevant, but the strong US data of recent favors US rate expectations over any appreciation in the yen. Money markets are fully-priced for a rate hike in March and see 55 bps of tightening over the next 12 months. With the bank now cautious about overshooting its inflation target, it could potentially speed up the rate of hike from roughly every six months to every three months, leaving the door open for a hike at the December meeting.

AUSTRALIAN DOLLAR: The Aussie is down 0.81% to $0.6871. Strong US data and domestic figures are weighing on the Aussie: consumer confidence fell to a four-year low, while business conditions remained negative following five RBA hikes this year. The domestic data points to signs that rate hikes from the RBA are working and could set up conditions for inflation to begin to moderate. Markets assigned an 82% probability that Australian rates had peaked, with a quarter-point cut fully priced by the end of 2027.

TREASURY FUTURES

Yields moved lower across the curve in a flattening move: 2s up 13.6 bps to 4.683%, 10s up 9.2 bps to 4.954% to leave the 2/10 spread down 5.10 bps at roughly 26.5 bps. October’s CPI report showed a moderation in headline inflation but little further progress in the core measure. The slowdown in the headline compared to September’s reading was a result of a sharp moderation in energy inflation to 0.7% from 5.2%, although food prices accelerated to 0.5% after being unchanged in September. Shelter rose 0.3%, down from 0.4%, but still accounted for more than 30% of the monthly headline increase. Owners’ equivalent rent increased 0.3% and tenant rent rose 0.2%. Broader services prices excluding energy increased 0.3%, with transportation services up 0.8%, motor vehicle insurance rising 0.7% and recreation gaining 0.8%. Used vehicles provided an offset, falling 1.2%, although core goods prices still increased 0.2%. The composition suggests that inflation pressure was not confined to energy. Alongside the stronger October employment report, it leaves the case for additional tightening intact. Waller’s pre-release support for a December hike and willingness to consider a larger move if inflation worsens also shifts attention toward the prospect of potential subsequent tightening rather than simply whether the Fed acts in December.

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