Global bonds have tumbled and the dollar has stayed firm after a hot US inflation print and hawkish central bank rhetoric raised the risk of an outsized half-point rate hike from the Federal Reserve, though stocks remained resilient.
Data showed overnight core US inflation ran at a monthly rate of 0.3 per cent in October, higher than the forecast 0.2 per cent. Before the data landed, Fed Governor Christopher Waller said a core reading of 0.3 per cent would prompt him to consider a 50-basis-point hike at the next meeting in December.
Dallas Fed President Lorie Logan said two more rate rises were needed, possibly rapidly, and Chicago Fed President Austan Goolsbee warned of a “real inflation issue” on hand, while Philadelphia Fed President Anna Paulson called for gradual rate hikes.
Fed funds futures now imply a quarter-point move is essentially locked in, with a 10 per cent probability of a 50 bp rise. A total of three quarter-point moves are fully priced in by the middle of next year.
Two-year Treasury yields surged 18 basis points overnight. Bonds in Asia were sold off, with Japan’s 10-year government bond yield up 7 bps to 2.755 per cent, and Australia’s up 6 bp to 5.05 per cent.
“Despite Waller’s comment, we continue to expect a second 25bp rate hike in December because we suspect that most FOMC voters would hesitate to jump to a 50bp hike,” said David Mericle, chief US economist at Goldman.
“But we are adding a third 25bp hike to our forecast in March 2027, which would take the funds rate to a peak of 4.25-4.5 per cent.”
In Asia, MSCI’s broadest index of Asia-Pacific shares rose 0.2 per cent, defying the weakness on Wall Street, and Japan’s Nikkei climbed 0.6 per cent on Wednesday.
Shares of SoftBank Group slid 3.3 per cent after it took a net loss of $US7 billion ($A10 billion) in the second quarter, hit hard by hefty buildout costs for US data centres.
South Korea’s KOSPI rose 0.4 per cent, while China’s blue chips lost 0.2 per cent.
Nasdaq futures bounced 0.5 per cent, while S&P 500 futures rose 0.2 per cent. European stock futures gained 0.6 per cent.
Nvidia remained at the centre of a political storm as the company probes whether CEO Jensen Huang was targeted by a foreign intelligence operation. Its shares slid 5.5 per cent overnight, taking losses from their recent peak to 30 per cent.
Against that uneasy backdrop, Anthropic is pressing ahead with its listing at a $US1.4 trillion ($A2 trillion) valuation, setting up a key test of Wall Street’s faith in the AI boom it helped ignite. The offer period runs until Tuesday with trading expected to start next Thursday.
The repricing in interest rate expectations lifted the dollar, which gained 0.5 per cent overnight against its major peers . It edged up another 0.1 per cent on Wednesday to 102.29.
The risk-sensitive Australian dollar was the biggest casualty in the currency markets, having dived nearly 0.9 per cent as traders wagered its central bank is done tightening after five rate rises this year with rate cuts expected next year.
Treasury yields climbed a little in Asia. The 2-year Treasury yield rose 2 bps to 4.7482 per cent after surging 18 bps overnight, while the 10-year yield rose 1 bp to 4.9958 per cent after a 12-bp rise overnight.
A stronger US dollar hit gold hard, with the precious metal down 2.6 per cent overnight before edging up 0.2 per cent on Wednesday to $4,030.56 an ounce.
“With yields higher across the curve, elevated carry costs, a firmer greenback, and possible liquidity challenges, it is likely that the yellow metal will trade back down to technical support near $US3,900 ($A5,665)/oz,” said analysts at TD Securities.
Oil prices rebounded on Wednesday after two days of losses on hopes that the Iran war would be resolved soon after the Democrats’ victory at the US midterm elections. Brent crude futures rose 0.7 per cent to $US92.16 ($A133.86) a barrel, having dropped as low as $US89.16 ($A129.50) overnight.
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