The October consumer price report lands on Tuesday, and it will decide whether the Federal Reserve raises interest rates in December or waits for more evidence. The report is the last inflation reading before the central bank meets on December 8 and 9, and it arrives after a week in which the market changed its mind twice about what the Fed will do. A hot number strengthens the case for a hike. A cool one lets the Fed wait.
Why it matters
The reason the report carries so much weight is the jobs report that came before it. Employers added 165,000 jobs in October, more than two and a half times the 65,000 economists had expected, and the unemployment rate dipped to 4.1 percent from 4.2 percent. Traders raised the odds of a December rate increase to about 78 percent, and the rate path swung back to December after the Thursday selloff had pushed it to March.
The market reaction to the jobs report was swift and broad. The 10 year Treasury yield rose about 4 basis points to roughly 4.87 percent, and the 2 year yield, which is especially sensitive to expected changes in the federal funds rate, climbed about 5 basis points to around 4.52 percent. The dollar index gained about 0.7 percent to 102.22, its biggest daily gain in nearly five months, and spot gold fell nearly 1 percent to about 4,050.95 dollars an ounce.
What happens next
The Federal Reserve context makes the shift unusually consequential. At its October 28 meeting the Fed held its benchmark rate at 3.75 to 4.00 percent on a 10 to 2 vote, with two dissents actually wanting to hike further, and inflation ran at 3.7 percent over the year to September, well above the 2 percent target. The case for a December hike rested on that inflation, and on a labour market that, while cooling, was not breaking.
What happens next will be decided by the inflation data on Tuesday. A hot consumer price reading would strengthen the case for a December hike and could push the odds higher still, while a cool one would let the Fed wait and could send the bets back to March. For now the message from the bond market is patience in reverse: the hike is still coming, and it is coming sooner than traders thought on Thursday.
