U.S. Indexes closed lower on Wednesday, with initial pressure following the hotter-than-expected US CPI report, particularly in the core metrics. Meanwhile, AI concerns continued to mount, with further weakness in memory stocks, while concerns over AI-related financing intensified after CoreWeave’s corporate bond yield rose above 15%, with Bloomberg noting that its bonds had reached levels typically associated with distress. AI-related stocks were sold aggressively throughout the session, raising broader concerns over credit risk and the sustainability of AI-related financing. Financials were lower again as Q3 earnings continue to display a mixed picture; BAC -4.8%, STT -4.1%, MS -2.8%. T-notes saw two-way trade, initially tumbling across the curve following the hot CPI report as markets ramped up expectations for further Fed tightening. However, as equity risk sentiment deteriorated, Treasuries gradually recovered throughout the remainder of the session, with only the front end settling lower in price while the longer end posted gains. Money market pricing saw a notable hawkish shift, with markets now assigning around a 50% probability of an October rate hike, up from 20% before the data. The Dollar was initially supported by the hotter-than-expected inflation report, although the Dollar Index retreated from its post-CPI peaks as Treasury yields gave back their gains, in turn providing some support for the Japanese Yen. Crude prices settled higher amid ongoing Saudi-Houthi strikes, while little progress was reported in US-Iran relations and further vessels were reportedly struck in and around the Strait of Hormuz. Meanwhile, Russia reportedly launched further strikes against Ukrainian energy facilities. Gold and silver came under pressure following the CPI report and failed to stage a recovery despite the subsequent reversal in Treasury yields, while Bitcoin also weakened. Overall, the September CPI report was hotter than expected. Core CPI rose 0.335% M/M, above the expected 0.2% and prior 0.290%, while the annual rate accelerated to 2.6% Y/Y (exp. 2.5%, prev. 2.4%). Headline CPI rose 0.649% M/M, accelerating from the prior 0.396% and broadly in line with the 0.6% forecast. The headline increase was primarily driven by a 9.1% rise in gasoline prices, which accounted for over half of the monthly increase in the all-items index. Within the core components, increases were seen in recreation, used cars and trucks, education, airline fares, medical care and apparel, while communication was among the few major categories to decline. The hotter-than-expected core print prompted markets to reassess expectations for the Fed’s October meeting, with the probability of a 25 basis points hike rising to around 50% from 20% before the release. Expectations for an October hike had previously diminished following softer-than-expected August PCE, weak September NFP data and recent commentary from Fed officials suggesting little urgency to tighten further. Attention now turns to Thursday’s PPI report for further insight into underlying inflation pressures, ahead of Fed Chair Warsh’s appearance at the IMF on Friday morning, where participants will look for his assessment of the data and any implications for the upcoming rate decision. Following the release, Pantheon Macroeconomics said the CPI report appears consistent with a 0.33% M/M increase in the core PCE deflator, which would lift the annual rate to 3.1% from 3.0% in August. However, Pantheon doubts the report is sufficiently strong to prompt an October hike given recent signalling from Fed officials, although its base case remains for a December hike amid the broad-based inflation momentum evident in the CPI data. A hotter-than-expected reading on Sept inflation is “discouraging” according to Fed Member Goolsbee but he wants to wait for more data before taking action to raise rates higher. He added that last month’s data was also discouraging yet noted: “We need to get more data.” Further, he said if the underlying trend in inflation is 4% core inflation, that is “not acceptable”, and policy needs to address that – 4% refers to the annualised pace of September’s monthly core inflation reading. On services, Goolsbee reiterated concern, which shows little sign of improvement and remains above 5%. On core goods inflation, he said it remains above 3% and should have declined as tariffs worked their way through, but it has not, suggesting more persistent inflation. That said, the 2027 voter continued to call himself one of the more “optimistic folks” at the Fed regarding how much progress can be made on inflation over the next year. Asked whether current interest rates are sufficiently restrictive to return inflation to 2%, or whether further hikes are needed, said he does not think we yet know the answer to that, but “if we get more months like this … that’s totally unacceptable”. The Chicago Fed President noted he is hearing widespread concerns about costs and prices across his Midwestern district, although, “there’s very little that we’re hearing that sounds like downturn, risks of recession, and things like that.” He added that the lack of recessionary signals makes him more concerned about demand-side overheating than a straightforward supply shock. Elsewhere, Oil closed a further 1% higher while a stronger Dollar saw Gold end Wednesday’s session with a 1.4% fall.
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