The 10-year U.S. Treasury yield surged back to 5% following an unexpected rise in U.S. inflation, amplified by comments from the Federal Reserve. A core CPI reading of 0.3% month-over-month suggests annual inflation could exceed 3%, well above the Fed’s target. Additional uncertainties from energy prices and AI investments have heightened market nervousness, especially after a strong payrolls report left little room for a dovish Fed stance.
Fed Governor Chris Waller’s remarks supporting a 25 basis point hike in December, with the possibility of a 50 basis point increase, further pushed Treasury yields higher. The 10-year yield rose 6 basis points, and the 2-year yield climbed 13 basis points since Waller’s comments. Markets now fully anticipate a 25 basis point hike in December, up from 20 basis points before Waller’s remarks.
Despite the inflation concerns, hopes for a de-escalation in the Middle East have driven energy costs lower, with retail gasoline prices dropping below $4 per gallon for the first time since mid-July. This could lead to a subdued November inflation print, potentially giving the Fed confidence to proceed with only a 25 basis point hike in December. The forecast does not anticipate further hikes in 2027, as cooling interest rate-sensitive sectors, lower energy prices, and weak wage growth are expected to dampen economic price pressures.
European rates are unlikely to follow the U.S. hawkish repricing blindly. While Euro and sterling rates initially mirrored the Fed’s moves, the 2-year EUR inflation swap fell, suggesting the spillover was purely in real terms. Europe’s inflation path differs significantly from the U.S., with greater exposure to energy prices compared to AI-driven growth in the U.S. Higher U.S. rates could tighten financial conditions for Europe, potentially reducing the need for aggressive rate hikes by the ECB or Bank of England.
Today’s data calendar is relatively light, with a U.S. holiday likely keeping trading quiet. However, several ECB speakers, including Cipollone, Kazaks, Nagel, and Lagarde, are scheduled to speak. The UK will sell £1 billion of Gilts, and Germany will auction €2.50 billion in total across 30-year and 21-year Bunds.