US inflation rose at an annual rate of 3.7% in September and 0.65% month over month. Producer inflation, which measures changes in the prices of goods used as inputs in the production process, reached 6.3% year over year and 1.3% month over month.
The main driver was energy prices, up 9.3% monthly and 35.3% annually, accounting for over half of the monthly increase in consumer prices.
Core inflation, excluding food and energy, came in at 2.6% year over year and 0.3% month over month, with persistent services inflation at 3.2% annually and goods prices facing additional pressure from Trump’s tariffs and rising electronics costs amid the AI boom.
No wonder the probability of a December rate hike rose to 75%. One would expect Treasury yields to rise and the S&P 500 index to fall, but while stocks did pull back, bond prices went up instead. Why?
It was a risk-off move rather than expectations of a more dovish monetary policy path in 2027, as a sell-off in semiconductor stocks, concerns over China’s CXMT advancing in high-density DRAM development, and fresh worries about CoreWeave prompted investors to seek safe-haven assets.
What is next?
Meta’s quarterly results could set the tone: strong numbers could fuel a rebound if investors see AI spending translating into real returns, with stronger orders, solid margins and sustainable cash flow; otherwise, the tech sell-off could deepen, driving investors toward Treasuries and pushing yields lower.
Beyond that, inflation is still running hot, energy prices remain high, and the labor market is holding up, giving the Fed little reason to turn dovish anytime soon. If anything, yields may be more likely to move higher again, especially if tensions in the Middle East escalate and push energy prices up further.
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