US Stocks Hit as Inflation Comes in Hot – Nasdaq off 0.74%
US stock markets came under pressure yesterday as hotter-than-expected inflation data increased expectations of further Federal Reserve interest rate hikes in December and beyond. The Dow Jones slipped 0.30% to close at 52,231, while the S&P 500 fell 0.38% to finish at 7,520. The Nasdaq led the losses, dropping 0.74% to close at 25,065, as higher interest rate expectations once again weighed on technology stocks.
US Treasury yields surged following the CPI release as traders moved to price in a more aggressive Fed outlook. The policy-sensitive 2-year yield jumped 17.6 basis points to close at 4.738%, while the benchmark 10-year yield climbed 10.8 basis points to finish at 4.990%, pushing back towards the psychologically important 5% level. The US dollar also rallied strongly against the major currencies, with the Dollar Index gaining 0.55% to close at 102.24, recovering much of the ground lost during the recent improvement in geopolitical sentiment.
Oil prices continued to drift lower as hopes of a potential peace agreement in the Middle East remained high. Brent crude slipped 0.54% to close at $92.07 a barrel, while WTI fell 0.93% to finish at $86.04. Traders remain focused on developments between the US and Iran, with the potential for a breakthrough in negotiations continuing to weigh on prices. However, with peace talks having broken down on numerous occasions over recent months, the risk of another sharp reversal remains high.
Gold suffered heavy losses as the stronger dollar and surging Treasury yields put significant pressure on the precious metal. Prices plunged 2.61% to close at $4,030.97 an ounce.
Hot US CPI Raises Stakes for Fed – January Rate Hike Odds Surge
US inflation data came in hotter than expected overnight, sending Treasury yields and the dollar sharply higher as traders ramped up expectations for further Federal Reserve interest rate hikes.
Headline CPI rose 0.4% in October against expectations of 0.3%, while the key Core CPI number increased 0.3%, also beating forecasts. The stronger numbers have all but locked in another 25-basis-point hike in December, but the bigger shift has been in expectations for January, where the market-implied probability of another hike has reportedly jumped from around 20% to over 60%.
The move comes alongside increasingly hawkish commentary from Federal Reserve officials, particularly since President Trump’s heavy defeat in last week’s mid-term elections. There is a growing feeling in markets that the election result has given the Fed greater freedom to focus on inflation without the same degree of political pressure from the White House.
Fed Governor Christopher Waller has even raised the possibility of a 50-basis-point hike in December, while other officials have indicated that further tightening may be necessary to get inflation back under control, a distinct change of rhetoric since the last meeting and the elections.
For traders, the focus is now shifting from whether the Fed will hike in December to just how far rates could rise in early 2027. The stronger dollar and higher Treasury yields are already putting pressure on equities and gold, and unless upcoming inflation numbers start to cool, that trend could have plenty further to run.
Quiet Calendar Day Ahead – Holidays to Thin Liquidity
Looking ahead, it is a relatively quiet day on the macroeconomic calendar, with little in the way of major economic releases to drive markets. ECB President Christine Lagarde is scheduled to speak during the European session, although geopolitical developments and the market’s reaction to yesterday’s inflation numbers are likely to remain the main focus for traders.
Liquidity is also expected to be thinner than usual, with holidays in France, the US and Canada reducing activity across several major financial centres. With markets still digesting the prospect of further Fed tightening and uncertainty surrounding Middle East peace negotiations, traders should remain prepared for sharp moves, particularly if fresh headlines hit during the European and US sessions.
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