Key Highlights

● October hike odds fell to roughly one in six from close to even on Wednesday.

● Futures data showed about one in seven, down from roughly one in three after CPI.

● The 10-year yield fell to its lowest since Sept 23 on Thursday.

● Odds of a hike by December stand at roughly three in four.

From spike to slump

On Wednesday, a hotter-than-expected September consumer price report sent traders scrambling to price in another Federal Reserve rate increase as soon as this month. By Friday, much of that bet had unwound.

Futures pricing showed the probability of an October hike at roughly one in six on Friday, down from close to even on Wednesday after the CPI release. Futures data told a similar story: the implied chance of a hike fell to about one in seven, down from roughly one in three after the CPI report and about one in four before it. Reports differed slightly on the exact level, but the direction was clear. One report said traders expect no change this month.

What drove the reversal

The swing reflected a sharp move in Treasury markets. The 10-year yield dropped on Thursday to its lowest level since Sept 23, after swinging over a 24-hour period. The yield ended Friday near 5.1, down for the week, having topped 5.30 earlier in October, its highest since 2002. The 2-year yield logged a third straight weekly decline.

Fed Chair Kevin Warsh did not push back. Speaking at an IMF gathering in Bangkok, he said, "I don't prejudge meetings." He was also reported to have said that global performance has broadly matched Fed expectations since the September hike.

The CPI report itself was hot. The annual inflation rate accelerated from August and topped expectations, according to a weekly market summary. Producer prices posted their largest monthly gain since March 2022. Yet investors appeared to conclude that one report was not enough to force the Fed's hand this month, especially after it raised rates a quarter point in September, its first hike in three years.

Not everyone agrees

Bank of America still expects an October hike, pointing to the breadth of price pressures across the core CPI basket. And markets have not abandoned tightening altogether. Futures data showed the odds of a hike by December at roughly three in four, up from about half a month earlier.

Stocks and the rate swing

Lower yields did not rescue technology stocks on Friday. The Nasdaq Composite sank 572.99 points to 26,140.03, and the S&P 500 fell 84.62 points to 7,659.44, as worries about AI financing dominated. One report tied part of the chip selloff to borrowing costs, with Intel (NASDAQ:INTC) and Lam Research (NASDAQ:LRCX) lower.

Rate-sensitive defensive sectors did better. Utilities and real estate gained, and Host Hotels & Resorts (NASDAQ:HST) rose. Utilities and consumer staples were among the six of 11 S&P 500 sectors that finished higher, per market data. Regional banks also reported earnings: Regions Financial (NYSE:RF) rose after beating estimates.

A market strategist said, "The good news is that we're starting to see a little bit of improvement in breadth."

Calendar After the Hike-Odds Swing

The Fed meets Oct 27–28 and announces its decision Oct 28. Housing starts (Oct 20), jobless claims (Oct 22) and S&P Global PMIs and University of Michigan sentiment (Oct 23) come first, with PCE inflation and the first third-quarter GDP estimate due Oct 29.