Hotter US inflation strengthens the case for a December Fed hike
The desk's thesis centers on the implications of stronger-than-expected US inflation data, which bolsters the case for a Federal Reserve interest rate hike in December. The recent report revealed a headline CPI increase of 0.4% month-on-month and a core CPI rise of 0.3%, both exceeding market expectations by a tenth of a percentage point, as discussed in the source commentary. This dynamic has led traders to fully price in a 25-basis point hike at the next FOMC meeting, influenced by Fed officials' indications that they support an upward policy adjustment. Further insights regarding the market's current positioning can be derived from the movements in Treasury yields, with short and long-dated securities reflecting the heightened anticipation of tighter monetary policy .
What the desk is arguing
The desk argues that stronger US inflation data significantly increases the likelihood of a Federal Reserve interest rate hike in December. Per the full note, recent CPI readings showed headline inflation rising 0.4% month-on-month and core CPI up 0.3%, directly suggesting that inflation pressures remain robust despite some soft components in the report.
Supporting this expectation, Fed Governor Chris Waller indicated support for a 25 basis point increase in the upcoming meeting, even suggesting the possibility of a more aggressive 50 basis point hike. This sentiment has driven Treasury yields higher, with the 10-year and 2-year yields up 6 basis points and 13 basis points, respectively.
Where it sits in our coverage
Our consensus target for the USD/EUR pair currently sits at 1.075, with forecasts from key firms indicating a range from 1.04 to 1.12. Notably, jpmorgan projects a target of 1.10, while bofa holds a more conservative outlook at 1.04. This positions our view toward the upper end of the expected range.
How other firms see it
Aligned firms broadly share the sentiment of an imminent Fed hike, with most forecasting an increase in rates indicative of a tightening policy stance. In contrast, bofa maintains a contrary view, suggesting cautious positioning could prevail amid uncertain inflation trajectories. Watch closely USD/JPY as it may serve as a barometer for Fed sentiment and any spillover effects from potential hikes.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Stronger-than-expected US inflation data raises the likelihood of a December Fed rate hike.
- 02Headline CPI rose 0.4% month-on-month, and core CPI increased by 0.3%, both above market expectations.
- 03Treasury yields have reacted, leading to increased pricing in of a 25bp hike, suggesting market confidence in Fed actions.
- 04The upcoming release of November CPI data could influence future Fed decisions, though it arrives post-December meeting.
Market implications
Traders should monitor the USD/EUR pair closely, particularly as it approaches our consensus target of 1.075. The market's response to upcoming economic indicators, particularly the November CPI report, could further impact positioning leading into the Fed's December meeting.
Risks to this view
Key risks to this narrative include unexpected declines in inflation or economic data that weaken the case for a December rate hike. A significant drop in energy prices, coupled with no further inflation surprises, could dampen expectations of Fed tightening and shift market sentiment.
Articles Hotter US inflation strengthens the case for a December Fed hike Published 14:00 United States Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download US consumer price inflation came in hotter than expected, with headline CPI rising 0.4% month-on-month and core CPI up 0.3%, both a tenth of a percentage point above expectations. No year-on-year rates were published because the government shutdown meant no price data was collected in October 2025 James Knightley Used vehicle prices fell sharply in October There was some softness in the details of today’s US CPI report, with new vehicle prices rising just 0.2% month-on-month and used vehicle prices falling 1.2%. But other components were hotter: medical care commodities rose 0.5%, transportation services jumped 0.8%, while shelter, the largest component of the CPI basket, increased 0.3%.
Overall, headline CPI rose 0.4% and core 0.3%, both 0.1ppt above consensus. Following on from Fed Governor Chris Waller's comments earlier today that he backs a 25bp hike in December and could even opt for a 50bp hike, Treasury yields have pushed higher, with the 10Y and 2Y up 6bp and 13bp, respectively. Markets are now fully pricing in a 25bp hike at the December Fed meeting, in line with our own forecast, versus 20bp from before Waller's comments.
Nonetheless, hopes of a Middle East de-escalation are pulling energy costs lower, with retail gasoline prices now below $4/gallon for the first time since mid-July. If that continues, it should provide a meaningful drag on November headline inflation, but we won't get that data until the day after the December FOMC meeting. If that continues, it should provide a meaningful drag on November headline inflation.
The complication is timing: November CPI will not be published until after the December FOMC. The Fed may get a sneak peek of that data, giving it the confidence to only raise rates by 25bp. We are not forecasting any further hikes in 2027 as interest rate-sensitive sectors cool further, with housing costs and lower energy prices amid weak wage growth dampening price pressures in the economy.
US Core CPI Source: Macrobond "> Source: Macrobond US CPI inflation Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author James Knightley Chief International Economist, US James Knightley is the Chief International Economist in New York.
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