Strong US CPI and hawkish Fed comments saw markets fully price a December Fed hike. US Treasury yields rose sharply, led by the front end, and US equities fell. The US dollar gained broadly

US inflation was stronger than expected, pushing Treasury yields higher, led by the front end, and equities lower. The data, alongside hawkish comments from Fed Governor Waller, saw the market add to Fed tightening expectations, with a small chance of a 50bp hike in December now priced. After solid gains in previous sessions, the S&P 500 is down more almost 1% in afternoon trading. The US dollar advanced and the NZD fell back below 0.5600. Brent crude fell, briefly dipping below US$90 per barrel, on optimism about a diplomatic end to the war and continued growth in energy exports from the Persian Gulf.

US CPI rose strongly again in October. Headline prices rose 0.4% m/m and core prices 0.3%, both 0.1% above expectations. No annual rates were published because last year's federal shutdown meant prices were not collected 12 months ago. The pressure extended beyond energy-sensitive goods. The share of core CPI components with monthly increases annualising above 3% rose to 59%. The CPI data are consistent with a 0.35–0.40% m/m rise in the core PCE deflator, which would lift annual core PCE inflation to 3.3% from 3.1% in September.

Fed Governor Christopher Waller, speaking before the CPI release, said he would support a rate hike in December and that a third firm monthly inflation reading could put a 50bp move on the table. He described the economy as strong and the labour market as stable, but said inflation remained too high. None of his colleagues have echoed the case for a larger move so far. Another option for the Fed would be to signal that back-to-back hikes in December and January are increasingly likely. Vice Chair Philip Jefferson and New York Fed President John Williams are among several Fed officials still due to speak this week.

Waller's comments, followed by the CPI data, saw markets price a faster and larger Fed tightening cycle. A 25bp hike at the December FOMC is now fully discounted, along with a small chance of a 50bp move. The 2-year Treasury yield rose almost 20bp to 4.75%, with the initial move on Waller's comments extending after the data. The curve bear-flattened, although the 10-year yield still rose 13bp to back above 5.0%. European bond yields followed Treasuries higher.

The rise in US front-end yields supported the US dollar, which made broad-based gains against G10 currencies, with the DXY up close to 0.7%. The AUD and NOK underperformed. NOK weakness likely reflects a further decline in oil prices, and it has been the weakest developed-market currency by some margin over the past week. The NZD fell back below 0.5600. Away from the US dollar, net moves across most NZD crosses were modest, although NZD/AUD edged up to a two-month high.

RBNZ Chief Economist Paul Conway, one of three MPC members who voted for a 25bp hike last month, said yesterday that inflation expectations will be key ahead of the December OCR decision. Expectations 5 and 10 years ahead are above the 2% target midpoint, near levels last seen when headline inflation exceeded 7% after Covid. "For me, the greater risk is that cost shocks become broader inflation pressures," he said, adding that all members agreed the OCR will need to rise further, depending on the outlook.

Pricing for the RBNZ's 10 December decision firmed slightly to about a 75% chance of a hike. Despite this, NZ rates further out the curve fell, in line with firmer global bonds during the local session. The 2-year swap rate fell 2bp to 3.70% and the 10-year swap rate fell 4bp to 4.32%. Bonds outperformed slightly, with the 10-year NZGB down 5bp to 4.61%. Overnight, the 10-year Australian bond futures yield is 7bp higher, pointing to upward pressure on NZ rates on the open.

Stuart Ritson is a senior Strategist at BNZ Markets.