Bonds reel as hot inflation fuels jumbo Fed hike fears

Global bonds experienced a significant decline while the US dollar remained strong following a surge in US inflation and the Federal Reserve's stern tone, which indicated a potential large half-point interest rate increase in the upcoming month. Although equities held their ground, the market reacted negatively to the data. Overnight core US inflation grew to 0.3% in October from the anticipated 0.2%, surpassing market expectations.

Prior to the release, Fed Governor Christopher Waller suggested that a core reading of 0.3% would warrant contemplating a 50-basis-point hike during the subsequent meeting in December. Dallas Fed President Lorie Logan advocated for two additional rate hikes, possibly with promptness, while Chicago Fed President Austan Goolsbee expressed concerns about the persistent inflation problem.

Philadelphia Fed President Anna Paulson recommended incremental interest rate increases. Fed funds futures now suggest a near certainty of a quarter-point rate move, with a 10% chance of a 50 basis point hike. Three quarter-point increases are fully priced in by mid-year. Two-year Treasury yields surged by 18 basis points overnight, with MSCI's Asia-Pacific index of shares increasing by 0.2%, contrasting the market weakness in the United States.

Japan's Nikkei rose by 0.6%. Nonetheless, SoftBank Group's shares fell by 3.3% due to a net loss of $7 billion in the second quarter, primarily driven by substantial US data center expansion costs. South Korea's KOSPI gained 0.4%, and China's blue chips declined by 0.2%. Nasdaq futures rebounded by 0.5%, and S&P 500 futures saw a 0.2% increase.

European stock futures surged by 0.6%. Amidst the political turmoil, Nvidia's shares dropped by 5.5% as the company investigated whether CEO Jensen Huang was the target of a foreign intelligence operation. Anthropic is progressing towards a $1.4 trillion valuation for its initial public offering, serving as a critical test of investor confidence in the AI boom it helped spark.