US Inflation Report Only Reinforces Expectations of Higher Interest Rates

Bret Kenwell, US Markets Analyst at etoro, on today’s US CPI report.

By not including the usual year-over-year comparisons, the October CPI report offers an incomplete picture of inflation. The monthly data did not help ease concerns either, as both headline and core CPI exceeded expectations. With markets already all but certain that the Federal Reserve will raise interest rates next month —and that there will be two more hikes by March 2027—, this report only reinforces expectations of higher rates.

After reaching highs not seen in decades, near 5.4%, the 10-year Treasury yield has pulled back for five consecutive weeks. However, 5% remains a key psychological level; today’s report could put it back in the spotlight by breaking that losing streak. Meanwhile, the short end of the yield curve could prove even more sensitive to any shift in expectations about the Federal Reserve.

Markets have handled both elevated Treasury yields and a strengthening US dollar better than many investors expected. However, this resilience could be put to the test if markets begin pricing in multiple rate hikes and, as a result, yields continue to rise. The biggest risk is not simply that yields rise, but that a path of higher interest rates becomes entrenched. This could pose a new headwind for equities, at a time when volatility in the artificial intelligence sector has already weighed on the major indices, even though the rotation into other sectors —beyond technology— has shown notable resilience.

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