US CPI data stronger than consensus sending US rates and USD higher; US equities lower with chunky falls. Then rates move retraced, leaving only small net change in yields. But equities and FX moves largely sustained

A hotter-than-expected US core CPI print sent US rates and the USD higher and US equities lower, as the market priced in more Fed tightening over the coming year. Although US rates retraced much of the move, currencies and equities did not. The NZD underperformed, falling to fresh lows.

Higher gasoline prices fuelled a 0.6% m/m rise in the US CPI, lifting annual inflation from 3.4% to 3.7%. Excluding food and energy, however, the core rate rose 0.3% m/m and 2.6% y/y, one-tenth stronger than consensus. Furthermore, the upside surprise appeared to reflect broad-based gains rather than special factors, with the breadth of inflation—measured by the share of components running at annualised rates above 3%—rising to 49%. PPI data due tonight will help firm up estimates of the core PCE deflator, the Fed’s preferred inflation gauge. However, it appears to have increased by about 0.32%, which would see inflation move in the wrong direction for the Fed, with the three-month annualised rate rebounding from 2.0% to 2.8%.

The upside inflation surprise prompted an immediate reaction across asset classes as the market priced in the prospect of further Fed tightening. In the rates market, the initial move gradually faded, leaving Treasury yields well below their highs. The 2-year yield jumped 18bps to 4.95% before retreating to 4.81%. The 10-year yield rose 14bps to 5.33%, just below recent highs, before easing to 5.21%. Net changes for the day are small.

Pricing for the next Fed meeting later in October moved from +5bps to +15bps, but has since retreated to +9bps. Traders may have recalled Fed Chair Warsh’s comment at the previous meeting that policy would not react to any single print, but rather to a range of data in determining the appropriate response. The market is pricing a series of hikes over the coming year, totalling around 86bps. We will hear from Warsh at the end of the week, when he speaks at the IMF–World Bank Annual Meetings.

European rates retraced much, if not all, of the spillover from higher Treasury yields. Germany’s 10-year yield therefore closed unchanged at 3.47%, while the UK 10-year yield fell 2bps to 5.42%. The French–German 10-year spread widened again, rising 5bps to 141bps.

US equities fell steadily following the CPI print and continue to track lower as we go to print, seeing no relief from the reversal in Treasury yields. The S&P 500 is currently down 1.2%, while the Nasdaq is down 2%, with technology stocks underperforming. The Euro Stoxx 600 rose 0.4%.

The USD posted broad-based gains after the CPI print, with most of the move sustained. The DXY index has risen to an 18-month high near 103, reflecting a notable fall in the euro to as low as 1.1115. The NZD broke below 0.5580, a support level that had held throughout October, and traded at a fresh low for the year of 0.5565. After trading above 0.70 yesterday, the AUD fell to 0.6960, making it one of the better performers overnight. NZD/AUD fell to a fresh 13-year low of 0.8004 before finding some support.

The NZD is weaker on most other key crosses, but is flat against the GBP, which has also underperformed. GBP is trading around 1.3160, while NZD/GBP is steady near 0.4240.

Yesterday, China’s PPI inflation rose sharply from 3.8% to 5.0% y/y in September, its highest rate since 2022. The increase reflected higher oil and commodity prices rather than stronger domestic demand. Even so, it suggests China could become a source of global inflation now that its disinflationary impulse has largely faded. Combined with the fall in NZD/CNY to a 17-year low, this adds to tradables inflation pressure in New Zealand.

China’s trade data continued their strong run, with exports and imports growing at annual rates above 30% in USD terms and the annual trade surplus well on track to reach a record high by year-end. Trade imbalances with the EU and US continue to widen. China has benefited from the AI boom through its exports of technology goods, although much of the gain has reflected higher prices rather than volumes. Strong demand for green-technology products has also contributed.

Domestic rate movements were minimal yesterday, with little direction from offshore markets. NZGB and swap yields were marked 1–2bps higher across the curve, with the 2-year swap rate up 2bps to 4.00% and the 10-year rate up 1bp to 4.69%. Although yields traded across a wide range overnight, the net move in the Australian 10-year bond future since the NZ close has been minimal.

On the economic calendar, Australian labour market data are released today and will help shape RBA policy expectations. Tonight brings the release of US retail sales and PPI data for September. The risk is skewed towards much weaker retail sales following the surge in August.

Jason Wong is the senior Markets Strategist at BNZ Markets.