The most interesting thing about Wednesday’s 3.7% CPI reading was not the number itself. It was what two different markets did with it.
The benchmark 10-year Treasury yield fell back to about 5.10% Thursday after rising as high as 5.333% on Wednesday evening. Meanwhile, the Nasdaq slid nearly 1.9% on Wednesday as rate-hike fears hit leveraged tech names hardest. Bonds and equities read the same inflation data and landed in completely different places. Tonight, Kevin Warsh gets to close that gap, or widen it further.
Warsh is scheduled to participate in a moderated conversation at the IMF’s Annual Meetings in Bangkok. The Federal Reserve will enter a communications blackout on Saturday, October 17, ahead of its October 27-28 policy meeting, making this the last scheduled opportunity for any Fed official to shift market expectations before the quiet period locks everyone down.
What the CPI Actually Said
The Consumer Price Index rose a seasonally adjusted 0.6% for the month, putting the 12-month rate at 3.7%. Gasoline costs were up 9.1% and accounted for over half of the gain in headline CPI, with the energy index jumping 5.2%. The energy story was expected. The core number was not.
Core CPI came in at 2.6% year-over-year and 0.3% month-over-month. Headline inflation ran hotter because of energy, but core inflation surprised to the upside too, strengthening the case for another Fed hike and raising the odds of an October increase.
Before the report, CME FedWatch priced about a 22% chance of a quarter-point hike at the October 28 meeting. After the release, those odds climbed to about 44% and briefly peaked near 58% before easing back.
Daly Pushed Back. Warsh Hasn’t.
San Francisco Fed President Mary Daly moved quickly to cool the move in rate expectations. She told Reuters: “We are more likely than not to need additional adjustments, but the timing of those adjustments to me is something we’re still deliberating. I don’t feel urgent that we have to decide with a limited set of information. I think we have the time that we need.”
Daly’s comments are the clearest pushback yet against the jump in October hike pricing that followed the CPI data, and they should trim the odds of a move on October 27-28 without denting expectations for a later increase. That is a bond-friendly message for the front end of the curve. Warsh is something else entirely.
Warsh has said he does not want to steer markets with his own near-term outlook for monetary policy, but the inflation surprise will heighten scrutiny of his remarks late Thursday New York time in Bangkok. His remarks will be closely scrutinized for any hint on the path of U.S. interest rates after the Fed raised its benchmark rate by a quarter point in September to a range of 3.75%-4%.
The Trade Setup Heading Into Bangkok
The bond market is currently pricing a dovish interpretation: yields eased back, the curve is not aggressively flattening, and safe-haven demand from a bruised equity market is providing a bid to Treasuries. Equities, particularly rate-sensitive technology names, are priced for something worse. That divergence does not survive tonight intact.
Treasury yields swung wildly after the hot September CPI data, first spiking higher with the yield curve flattening before reversing lower as risk sentiment drove a bid into the Treasury market. That sequence tells you bond traders are less concerned about a hike than equity traders are, which means one group is wrong about what Warsh does on October 28.
If Warsh signals patience tonight, consistent with Daly’s framing, the 10-year yield holds near current levels or drifts lower, and beaten-down tech names get a relief bounce. If he leans into the data and keeps October genuinely open, expect the 2-year yield to spike, the equity sell-off to resume, and the dollar to reclaim Wednesday’s post-CPI gains. Watch the 2-year Treasury reaction in the minutes after his remarks as the cleanest real-time read on which way the trade resolves.
The Fed enters its communications blackout on Saturday, October 17, ahead of the October 27-28 meeting. Before then, if the Fed wishes to signal its stance on interest rate decisions, Warsh’s remarks represent the critical final channel. Traders who wait for the blackout to lift will already be too late.
