September’s CPI print just locked in another 75bp hike at the Fed’s next meeting.
Although below the previous month’s, the headline number came in above the 8.0% expectation and printed at 8.3%. Excluding trading-influenced food and energy prices, Core CPI was expected to remain flat at 0.3% but instead printed at 0.6%.
The month over month change, which is being more closely watched for its indication of whether inflation is accelerating or decelerating, also beat expectations. Markets had been pricing in a negative monthly CPI number.
Last month’s round of data had suggested that inflation might have already peaked, spurring hopes that the Fed would be able to take their foot off the brakes sooner. The stubbornness of inflation, however, has instead diminished some of those hopes.
Prior to this morning’s data, markets had been pricing in a 93% chance of a 75bp hike at the September meeting. Now, markets place a 20% chance on a 100bp hike.
The 10-year Treasury reacted by surging 15bps higher to 3.45%, almost matching levels from the market’s reaction to this past June’s Fed meeting. The 10T’s departure from the critical 3.25% level may have been the catalyst needed to send rates materially higher. In a similarly dramatic fashion, the 2-year Treasury leapt 23bps.
Since early September, equities had been on an escalator ride testing the highs we saw just a couple of months ago. Yesterday’s survey of consumer inflation expectations, which printed lower than the previous month, backed that optimism. However, the tech-heavy Nasdaq's initial reaction to the looming 75bp Fed rate hike was a dip by more than 3%, trailed closely by the S&P and Dow.
If you’re about to purchase an interest rate cap on your floating rate financing, expect both the pop in short-term rates and heightened market volatility to drive the price higher. Borrowers with an imminent fixed rate lock might also see an unexpected increase in their rate at execution.
