A hotter core inflation reading briefly pushed the 10-year yield above 5.3%, but it finished Wednesday lower and the dollar slipped overnight. The bond market appears to be weighing growth, credit risk and Fed officials' caution alongside the price data.
On a day when the consumer price index came in hotter than forecast, the 10-year Treasury yield ended lower than it started. That reversal is the more important signal for investors trying to judge what the Federal Reserve does next.
September consumer prices rose 0.6% from August and 3.7% from a year earlier, up from 3.4%, the Bureau of Labor Statistics said Wednesday. Core prices, which exclude food and energy, rose 0.3% for a second month, a tenth above the consensus forecast, lifting the annual core rate to 2.6% from 2.4%. Gasoline jumped 9.1% on the month and accounted for more than half the headline gain.
The round trip in rates
The first reaction matched the data. The 10-year yield climbed to about 5.33% after the 8:30 a.m. release. By the close it stood at 5.19%, two basis points lower on the day, according to Treasury's daily par yield curve. The 30-year yield fell four basis points to 5.52%. Shorter maturities finished higher, led by the two-year note, the maturity most tied to the next few Fed meetings, which rose three basis points to 4.82%. Maturities of five years and longer were flat or lower.
The pattern carried overnight. The dollar index fell about 0.7% to near 101.8 early Thursday, the euro rose to about $1.122 and the yen firmed to about 157.75 per dollar. Gold futures gained about 1.7% to roughly $4,176 an ounce. Futures on the S&P 500 pointed lower after the index fell 1.1% on Wednesday to 7,718.94.
Fed pricing followed the same arc. The probability of a rate increase at the Oct. 27 and 28 meeting rose to roughly half on Wednesday morning, from about 22% before the report, then fell back to about 26% overnight, according to CME FedWatch data.
Two readings of the same day
One reading is that inflation is broadening and the Fed is not done. Core goods and core services both accelerated in September, airline fares are up 22.4% from a year ago, and KPMG chief economist Diane Swonk estimated a 0.4% monthly rise in services prices excluding housing. Swonk said she expects "at least two more rate hikes by early 2027, starting in December."
The other reading is that tighter financial conditions are doing some of the Fed's work. A sharp selloff in technology stocks and in the debt of companies financing artificial-intelligence data centers ran through Wednesday afternoon and into Asian trading, where South Korea's main index fell 7.6%. The Fed's Beige Book, released the same afternoon, described consumer spending as little changed across most of the country. Fed Vice Chair for Supervision Michelle Bowman said in Bangkok on Wednesday, "I don't feel any urgency for taking further action at this point."
Rising short-term yields alongside a falling 10-year yield fit both stories at once: investors expect somewhat tighter policy in the near term but slower growth further out. That is not the market behavior that typically accompanies an inflation scare alone.
What to watch
September producer prices, retail sales and weekly jobless claims at 8:30 a.m. Thursday will test which reading holds. A strong retail sales figure would weaken the slowdown argument. The Fed's decision on Oct. 28 and the October consumer price report on Nov. 10 follow.