Following a hotter-than-expected core US inflation report, bond traders have significantly increased their expectations for Federal Reserve interest-rate hikes. Interest-rate swaps now indicate a 90% probability of a rate increase next week, with market participants fully pricing in two hikes by the end of the year. This reflects mounting evidence of persistent price pressures that are expected to compel Chairman Kevin Warsh's central bank to act.
Initially, Treasuries saw a dip, but later rebounded on Friday. The August consumer price index, excluding volatile food and energy components, rose by 0.3% month-over-month, exceeding the Bloomberg survey's median estimate of 0.2%. On an annual basis, core CPI advanced 2.4%, further bolstering the case for the Fed to raise rates. The overall CPI, including food and energy, climbed 0.4% month-over-month and 3.4% year-over-year, aligning with consensus estimates.
The 10-year Treasury yield, after briefly touching nearly 5%, pulled back, while the 2-year Treasury yield rose to levels not seen in over two years, indicating investor expectations for higher short-term rates. The 30-year yield also reached a 19-year high before retreating. This bond market activity suggests that investors are anticipating a new hiking cycle from the Fed, especially with core inflation running above the central bank's 2% annual target. Analysts like Ian Lyngen of BMO Capital Markets and Darrell Cronk of Wells Fargo confirm that the report clears the path for the FOMC to hike next week, potentially followed by additional increases.
