US October CPI exceeded expectations across the board! A Fed rate hike in December is all but certain, with a 50-basis-point option emerging.

US October headline and core CPI both came in above market expectations on a monthly basis, indicating that price pressures remain elevated and reinforcing the case for the Fed to continue raising rates. Data released Tuesday by the US Bureau of Labor Statistics (BLS) showed that US October CPI rose 0.4% month-on-month, above the market expectation of 0.3% and following a prior reading of 0.6%; core CPI, which excludes volatile items such as energy and food, rose 0.3% month-on-month, above the market expectation of 0.2% and in line with the prior reading of 0.3% (there is no year-on-year data for October CPI and core CPI because the US federal government shutdown in October last year resulted in missing CPI data). By component, according to the BLS official data table, October energy prices rose 0.7% month-on-month, sharply narrowing from 5.2% in September, with gasoline slowing from a 9.1% increase to a 1.0% increase. However, food prices shifted from flat month-on-month in September to a 0.5% increase. Within core inflation, housing rose 0.3% month-on-month (owners' equivalent rent up 0.3% month-on-month and rent up 0.2% month-on-month), transportation services rose 0.8% month-on-month, motor vehicle insurance rose 0.7% month-on-month, and airfares rose 0.4% month-on-month; used car prices instead fell 1.2% month-on-month. After the release of the US October CPI data, the market increased its bets on Fed rate hikes. In addition to pricing in an almost 100% probability that the Fed will raise rates in December, the market increased its bets that the Fed will raise rates by 50 basis points next month and further increased its bets that the Fed will raise rates at least twice before mid-2027. In terms of financial market reaction, US Treasury yields moved higher the two-year Treasury yield, sensitive to monetary policy, rose 16.54 basis points to 4.715%; the ten-year Treasury yield rose 9.03 basis points to 4.952%. The dollar index DXY moved sharply higher by nearly 30 points to 101.97. The three major US stock index futures moved lower, with Dow futures down 0.17%, S&P 500 futures down 0.75%, and Nasdaq 100 index futures down 1.20%. Spot gold extended its intraday decline to 2% to $4,043.4/oz; spot silver extended its decline to 3% to $51.75/oz. It is worth noting that this CPI data is the last inflation reading before the Fed's December 8-9 policy meeting (November CPI is scheduled for release on December 10, the day after the decision, at which point year-on-year figures will resume). Last week's October nonfarm payrolls showed an increase of 165,000 jobs, far exceeding expectations, and the unemployment rate fell to 4.1%. Combined with the absence of cooling in this core inflation reading, the market focus has shifted to whether the December rate hike will be 25 or 50 basis points. More importantly, this CPI data may also have coincided exactly with the threshold for a larger rate hike that Fed Governor Waller mentioned on Tuesday. Waller said on Tuesday that he supports a rate hike in December and warned that if inflation continues to accelerate, he would support a 50-basis-point hike to preserve the Fed's credibility. Waller said that despite a strong economy and a stable labor market, inflation remains too high. Waller said: "If, as I expect, October inflation improves on a month-on-month basis, I would lean toward supporting a 25-basis-point increase in the policy rate." "But if the October CPI data released later today are similar to the readings of the past two months with core CPI inflation at around 0.3% or even higher then stronger policy action may be needed. In that case, I think a 50-basis-point hike should be considered at the December meeting." Waller's blunt remarks are the strongest signal yet from a Fed official that policymakers not only need to raise rates in December, but that the size of the increase may exceed the market's expected 25 basis points.