Key Highlights

● September CPI, released Wednesday Oct 14, topped the consensus forecast as annual inflation accelerated.

● Treasury yields swung, with the 10-year hitting its lowest since Sept 23 on Thursday.

● The VIX rose to 19.99 after touching 22.31, its highest since June 11.

● Palantir entered correction territory while utilities, staples and energy gained.

The report

The September consumer price index, released Wednesday, Oct 14, came in hotter than economists expected. The annual inflation rate accelerated from August and topped the consensus forecast, according to a weekly market summary, and the monthly gain in headline prices was sizable.

The reading arrived as the Federal Reserve had only just resumed raising rates. In September the Fed lifted its benchmark by a quarter point, its first hike in three years.

Odds spike, then fade

The immediate reaction was a scramble to price in more tightening. Futures pricing showed odds of an October hike jumping to close to even on Wednesday. Separate futures data showed the implied chance rising to about one in three after the CPI report, from roughly one in four before it.

The move did not last. Treasury yields swung sharply, and on Thursday the 10-year fell to its lowest since Sept 23. By Friday, October hike odds had fallen to roughly one in six. Markets still price a hike by December, with futures data showing roughly three-in-four odds of a move by then. Bank of America still expects October.

Fed Chair Kevin Warsh declined to weigh in. "I don't prejudge meetings," he told an IMF gathering in Bangkok.

More hot data followed

The CPI report was the first in a string of strong readings. Producer prices posted their largest monthly gain since March 2022. Retail sales rose more than expected. On Friday, import and export prices both beat forecasts, and industrial production rose to its highest level since 2018.

Stocks stumble

The inflation scare combined with a growing debate over AI financing to produce a rough week for equities. On Friday, the S&P 500 fell 84.62 points to 7,659.44, ending a streak of 55 sessions without a sizable daily decline, the longest in over six years. The Nasdaq Composite sank 572.99 points to 26,140.03, capping its worst week since the week ended June 26. The Dow Jones Industrial Average slipped 175.28 points to 52,002.41 but rose for the week. The Russell 2000 fell about 85.6 points over the week.

The Cboe Volatility Index jumped to 19.99, touching 22.31 intraday, its highest level since June 11.

Technology bore the brunt. CoreWeave (NASDAQ:CRWV) plunged to $61.39 amid attention on its debt load. Palantir Technologies (NASDAQ:PLTR) entered correction territory, and Advanced Micro Devices (NASDAQ:AMD) and Micron Technology (NASDAQ:MU) sank. Market commentary linked part of the chip selloff to rising borrowing costs.

Defensive sectors held up. Utilities, staples and energy gained, and Visa (NYSE:V) and Mastercard (NYSE:MA) set intraday records. One analyst said, "Global equity markets are ending a difficult week on a more stable footing." A market strategist added, "The good news is that we're starting to see a little bit of improvement in breadth."

CPI Fallout Into Late October

The Fed announces its decision Oct 28 after a two-day meeting. PCE inflation, the Fed's preferred gauge, arrives Oct 29 along with the first estimate of third-quarter GDP. University of Michigan sentiment on Oct 23 and housing starts on Oct 20 will be watched for inflation expectations.