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October’s US Consumer Price Index (CPI) report, released on 10 November, removed whatever doubt remained over whether the US Federal Reserve (Fed) would follow its September hike with another in December.
US headline CPI rose 0.4% month-on-month against an expectation of 0.3%, while core CPI advanced 0.3% against an anticipated climb of 0.2%. This is the third consecutive print at that pace, lifting the US’s three-month annualised core rate to 3.7%, its highest since April 2024. Due to October 2025’s data being lost during last year’s government shutdown, the Bureau of Labor Statistics did not publish annual rates, although interpolated estimates place headline inflation over the time near 4.0% and core near 2.8%. More telling than the level of inflation, was the breadth of the increase, since the gains extended across both goods and services rather than resting on the energy component that accounted for more than half of September’s 0.6% rise, which suggests that the oil shock tied to the US conflict with Iran is now working its way into the wider price structure.
US CPI “borderline disturbing”
What turned a firm print into a repricing event was the order in which information reached the market. Speaking in London hours before the release, Fed Governor Christopher Waller set a conditional threshold, arguing that should core CPI come in around 0.3% or higher, a 50 basis point hike ought to be considered at the 8 to 9 December Federal Open Market Committee (FOMC) meeting, because a 25 basis point move, alone, would place the Fed’s credibility at risk. The data met that condition exactly, and the regional Fed presidents who spoke afterwards reinforced the message. Dallas Fed President Lorie Logan estimated that the 3.75%-to-4% target range sits at least 50 basis points below the level needed for even modest restriction, noting that the real policy rate is only around 78 basis points once inflation expectations are taken into account. Philadelphia Fed President Anna Paulson said further gradual tightening seems appropriate but that the Fed would move more aggressively should the inflation picture deteriorate. Chicago Fed President Austan Goolsbee went further, describing the report as “distressing, borderline disturbing.”
The market response was concentrated on shorter-term Treasury yields, with the two-year yield closing 17.6 basis points higher on the day in a pronounced bear flattener (where short-term interest rates increase faster than long-term rates, flattening the spread between them) while the 10-year returned to above 5%. The US Dollar Index (DXY) extended its advance to an intraday high of 103.08 earlier on Thursday, its strongest level since April 2025. That move warrants some qualification, however, because the euro carries close to 58% of the index’s weighting, and a meaningful share of the dollar’s gain since August reflects euro weakness linked to fiscal and political strain in France and Spain, with the dollar’s advance on a broader trade-weighted basis amounting to roughly half of what the DXY implies. .
Jumbo hike, at least, unlikely
Rate expectations have shifted accordingly. CME FedWatch pricing moved from around 84% odds of a December hike on 9 November to a hike now being fully priced in, with the probability of a 50 basis point move rising from zero to between 10% and 15% over the subsequent sessions, and close to 60 basis points of cumulative tightening now priced through to the 17 March 2027 meeting. The question for December is, therefore, no longer one of direction but of size, and on that point the case for a jumbo hike is weaker than the headlines suggest.
Waller’s own stated base case remains a 25 basis point increase, and his 50 basis point threshold reads as deliberate signalling, consistent with his recent defence of a communication style that shapes market probabilities without committing the FOMC to a particular outcome. More importantly, the officials pressing hardest for tighter policy are arguing for frequency rather than size, as Logan’s call for at least two further 25 basis point increases at a quicker pace and Paulson’s preference for gradual steps both point to a sequence of standard moves rather than a single outsized one. The data supports that reading, since US core inflation holding at 0.3% for three months describes entrenchment rather than acceleration, which argues for sustained tightening rather than an emergency response, particularly with energy prices having retreated in recent weeks. The FOMC will also vote without the November CPI, which is due on 10 December, a day after the decision, and with the 10-year yield above 5% and the dollar at an 18-month high, financial conditions have already tightened ahead of the Fed decision. A 50 basis point move in those circumstances would risk signalling that policymakers believe they have fallen behind the curve, which is precisely the impression a committee focused on its credibility would prefer to avoid.
An embedded cycle
The more consequential risk therefore lies in the path beyond December rather than in the size of the next step. Markets that entered 2026 anticipating further easing are now pricing in a tightening cycle that extends into 2027. The Personal Consumption Expenditure (PCE) index release, the Fed’s preferred inflation gauge, later this month, followed by the January and March meetings, will determine whether the cycle concludes with two further increases or runs considerably longer.
Market moves
Bonds
The 10-year yield is trading back around 5%, having pushed decisively through that threshold after October CPI came in hotter than expected. The data forced a wholesale repricing of the Fed’s path leaving yields roughly 15 basis points higher on the week after starting from near two-month lows.
German Bund yields have drifted higher in sympathy, the 10-year sitting near 3.3% as markets lift the odds of the European Central Bank (ECB) tightening into 2027. The move, however, is modest relative to the swing in US Treasuries.
UK gilts remain under pressure, with the 10-year holding just above 5.2% and close to its highest level in a generation. The Bank of England’s (BoE’s) decision to raise rates for the first time in over three years still dictates the market, and a firmer-than-expected third quarter gross domestic product reading of 0.7% has given the hawks little reason to retreat. Gilts remain the highest-yielding major developed market bond by some margin.
Equities
Looking at US equities, Thursday’s weaker close across the board with the S&P 500 off 0.35% at 7,592.40, the NASDAQ 100 down 0.30% at 28,289 and the Dow Jones Composite 0.39% weaker at 16,503, does not reflect Wall Street’s week. From last Friday’s close of 7,376.86, the S&P 500 has advanced almost 3%, and the Dow has recovered back above 52,000 for a gain of more than 2%, as the brutal early-November sell-off in artificial-intelligence and semiconductor names, which had handed the S&P 500 its worst single session since the 2025 tariff shock, reversed.
Asia is extending Wall Street’s week this morning. Japan’s Nikkei 225 closed up 0.53% at 61,142. Whilst Korea’s KOSPI was down 0.98% at 5,290 on the day, both remain at or close to record territory as chip and AI exporters surge. The read-through is a direct continuation of Wall Street’s technology bounce rather than a regional story of its own, and it sets a constructive backdrop for Europe’s open today.
European equities closed firmer on Thursday and continue to trade near record highs, with the Euro Stoxx 50 drawing support from the same AI-led rebound and from a steadier rates picture; the swing factor from here is Germany’s Bund yield and the degree to which markets price in ECB tightening into 2027.
In the UK, the FTSE 100 closed Thursday up 0.3% at 10,863, a shade below its record and firmer on the week, the resource-heavy index being helped by its global earnings base even as hawkish BoE pricing weighs on domestically focused names.
Commodities
Gold is the clearest casualty of this week’s shift in the rates narrative. Spot bullion is trading at $3,908/ounce, up 0.8% overnight in a modest stabilisation, but that bounce sits inside a bruising week that saw the metal fall from above $4,040/ounce last Friday. Gold has shed roughly 3% as the surge in Treasury yields and the firmer dollar lifted the opportunity cost of holding a non-yielding asset. For now, the move looks like a rates-driven correction rather than a change of trend, but the 5% Treasury yield is the level to watch, a sustained break higher would keep pressure on bullion.
Brent crude is largely stable, with the front-month contract trading at $95.15/barrel and the spot benchmark a little lower at $93.74/barrel, both a touch softer on the week after the previous week’s steep decline and a dip to ten-week lows near $91.50/barrel mid-week. The complex is still dominated by the prospect of easing geopolitical risk premia.
Currencies
The dollar has regained its footing with the DXY trading at 103.13, essentially flat overnight but firmer across the week as the US’s hot CPI print and the resulting hawkish Fed repricing pulled capital back towards the greenback. The move has been broad, and it frames the exchange rates across the majors and the emerging-market complex.
The euro has given up ground against that backdrop, with $/€ trading around $1.1060/€, with the single currency on the back foot as the rates differential shifted in the dollar’s favour and European data offered little support.
The UK’s sterling is holding up somewhat better at around £1.3240/$, underpinned by the BoE’s recent rate hike and the firmest government bond yields in the developed world, though it too has been unable to resist demand for the dollar.
*Please note that all information is at the time of writing.
Key indicators:
GBP/USD: 1.3228
GBP/EUR: 1.1976
GBP/ZAR: 22.20
BRENT CRUDE: $96
GOLD: $3,895
Sources: Bureau of Labor Statistics, KPMG, Axios, FXStreet, investinglive, CNBC and CME Group.
Written by Citadel Global Managing Director, Bianca Botes.