“Fed may take a ‘big step’ next month amid inflation jitters” ... U.S. Treasury prices plunge

【Financial News New York Correspondent Lee Byeong-cheol】 With U.S. inflation rising more sharply than expected, concerns are mounting that the Federal Reserve (Fed) may accelerate the pace of rate hikes. As speculation grows that the Fed could raise its benchmark rate by 0.5 percentage point next month in a “big step,” U.S. Treasury prices plunged and yields surged.
Expectations are growing in the market that the Fed’s monetary tightening could proceed faster and more forcefully than anticipated.
According to the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) on the 10th local time, the Consumer Price Index (CPI) rose 0.4% in October from the previous month. That was above the market forecast of 0.3%. Although the increase was slower than September’s 0.6%, the data confirmed that inflationary pressures remain strong.
Core CPI, which excludes volatile food and energy prices, rose 0.3% from the previous month. It has continued to increase by 0.3% for three consecutive months since August. Housing costs rose 0.3%, while food and energy prices increased 0.5% and 0.7%, respectively.
The higher-than-expected inflation data prompted financial markets to quickly price in the possibility of further Fed rate hikes. In particular, expectations emerged that the Federal Open Market Committee (FOMC) could raise the benchmark rate by 0.5 percentage point in one go next month.
Fed Governor Christopher J. Waller (pictured) had previously said that if core CPI rose 0.3% in October, he could consider a 0.5-percentage-point rate hike at the December meeting. With the reported core CPI reaching that level, market concerns about a big step intensified.
According to the CME FedWatch Tool, after the October inflation data were released, the probability of the Fed raising its benchmark rate by 0.5 percentage point in December rose from about 1% before the release to around 15% intraday. The market, however, still sees a 0.25-percentage-point hike as the base-case scenario.
The U.S. Treasury market was hit hard as expectations of rate hikes strengthened.
The yield on two-year Treasuries, which is sensitive to changes in monetary policy, surged 19.28 basis points on the day to 4.74% (1 basis point = 0.01 percentage point). This was the largest one-day increase since April last year. The 10-year Treasury yield also rose to 4.988%. Because Treasury yields and bond prices move in opposite directions, the sharp rise in yields means bond prices plunged.
The shock to the bond market spread to stocks as well. The sharp rise in U.S. Treasury yields stoked concerns about higher corporate borrowing costs and the diminished relative appeal of stocks as an investment. On the day, the Dow Jones Industrial Average fell 0.30%, the S&P 500 fell 0.38%, and the Nasdaq Composite dropped 0.74%.
Markets increasingly see not only the direction of Fed policy but also the pace and scale of rate hikes as key factors that will shape financial markets going forward. In particular, observers say that if inflationary pressures do not ease easily, the Fed could tighten policy more aggressively than expected, further increasing volatility in the Treasury and stock markets.
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