Inflation jitters throw a wrench into US Treasury auction as Fed official flags jumbo hike

Global bond prices plunged and the US dollar strengthened following surprisingly strong US inflation figures and stern comments from federal central bank officials, hinting at a potentially large increase in interest rates by the Federal Reserve next month. Although equities managed to hold their ground, market sentiment remained cautious.

US overnight core inflation increased to 0.3% in October, exceeding expectations of 0.2%. Fed Governor Christopher Waller indicated that a core reading of 0.3% would lead him to consider a 50-basis-point hike at the subsequent meeting in December. Dallas Fed President Lorie Logan suggested that two more rate hikes would be necessary, possibly soon, while Chicago Fed President Austan Goolsbee expressed concern over a "real inflation issue."

Philadelphia Fed President Anna Paulson advocated for steady rate increases. Fed funds futures now suggest a quarter-point rate increase is almost certain, with a 10% chance of a 50-basis-point hike. A total of three quarter-point hikes are already reflected in the market outlook for the middle of next year. Two-year Treasury yields jumped by 18 basis points overnight.

Asian bonds suffered as investors withdrew, with Japan’s 10-year government bond yield climbing 7 basis points to 2.755%, and Australia’s yield rising 6 basis points to 5.05%. Despite Waller's remarks, Goldman's chief US economist, David Mericle, anticipated only two 25-basis-point rate hikes in December, expecting a third in March 2027, which would push the federal funds rate to between 4.25% and 4.5%.

In Asia, MSCI's broad Asia-Pacific share index dipped 0.2%, contrasting the downturn on Wall Street, while Japan's Nikkei rose 0.6%. SoftBank Group's shares fell 3.3% after reporting a net loss of $7 billion in the second quarter, primarily due to high costs associated with US data center expansion. Asian equities, however, benefitted from falling oil prices, lifting the South Korean KOSPI by 0.4% and Chinese blue chips down 0.2%.

Nasdaq futures surged 0.5%, and S&P 500 futures climbed 0.2%. European stock futures also gained 0.6%. Nvidia's shares dropped 5.5% amid a political controversy, with CEO Jensen Huang potentially targeted by a foreign intelligence operation, causing share prices to fall from their recent high to 30%. In contrast, Anthropic was advancing with its planned IPO at a $1.4 trillion valuation, marking a critical test of investor confidence in the AI boom it helped drive.

Trading is set to commence next Thursday. A firmer US dollar and rising gold prices were the main takeaways from the currency and precious metals markets.