US stocks decline, bonds sell off, dollar gains on hot CPI data

• The headline CPI came in at +0.4%, overshooting the +0.3% forecast. The prior reading was +0.6%.

• Core CPI rose +0.3%, above the +0.2% expectation, matching the previous month's increase.

• The three-month annualized rate through October, based on compounded seasonally adjusted monthly data, stood at +5.7% for the headline figure and +3.7% for the core measure.

Seasonally adjusted October data compared with September

• Shelter costs increased 0.3%, down from 0.4%. Although the pace moderated, shelter still contributed over 30% to the overall headline rise. Owners' equivalent rent advanced 0.3%, while rents gained 0.2%.
• Transportation services climbed 0.8%, up from 0.6%. Auto insurance accelerated sharply to +0.7% from +0.1%. Airfares rose 0.4%, a slowdown from 1.2%. Used cars and trucks acted as a counterbalance, declining 1.2% following a 0.7% increase.
• Recreation prices increased 0.8%, compared with 0.5% previously. Price gains accelerated in this second core basket category.
• Food costs rose 0.5%, versus flat in the prior month. Grocery prices rebounded 0.4% after a 0.1% decline. Beef increased 0.9%, while fruits and vegetables, along with dairy, each rose 0.6%.
• Energy prices advanced 0.7%, a sharp deceleration from 5.2%. Gasoline rose 1.0% after September's 9.1% surge, but electricity accelerated to 0.9% from 0.2%.

The Nasdaq Composite led the early sell-off, dropping 322 points. The S&P 500 fell 46 points, and the Dow declined 109 points. Headline inflation eased as gasoline price increases moderated, but core CPI held at +0.3% for the third consecutive month. Shelter still accounted for over 30% of the headline gain, and transportation services accelerated to +0.8% from +0.6%.

Treasury yields rose, with the front end leading the move

• The 2-year yield reached 4.687%, up 14.0 basis points

• The 5-year yield stood at 4.764%, gaining 10.5 basis points

• The 10-year yield hit 4.934%, adding 7.2 basis points

• The 30-year yield rose to 5.292%, up 3.6 basis points

Markets now price in nearly a 100% probability of at least a 25-basis-point rate hike in December, with about a 12% chance of a 50-basis-point move. The market also sees roughly a 54% chance of another increase in January. The 2-year yield climbed nearly twice as much as the 10-year as traders adjusted their expectations for the near-term Fed path.

EURUSD and GBPUSD fell back below their 200-hour moving averages

• EURUSD traded at 1.1187, down 0.32%, with the session low at 1.1180. The 200-hour MA was breached at 1.1196 and now serves as a close-risk level. The next target is the swing area between 1.1152 and 1.1160.

• GBPUSD traded at 1.3398, down 0.31%, with the session low at 1.3391. The price dipped below the 100-day MA at 1.3395, but the decline has slowed near that level. Other MAs, including the 200-day MA, were broken at 1.34169, which now acts as a risk level.

• USDJPY rose 0.34% to 158.43. The price remains below the 200-day MA at 158.68. The price needs to breach and sustain above that level. The 100-hour MA at 158.12 and the 200-hour MA at 157.99 are risk levels.

Crude oil dropped 2.4% to $84.47. The low was $83.88, and the high was $86.93. The price moved away from its converged 100- and 200-day MAs at $87.15. Staying below that level is more bearish for today and the outlook ahead.

Gold declined on the back of higher yields and a stronger US dollar. The price fell $89 to $4051.50. It moved back below the 100-hour MA at $4090.07 but remains above the 200-hour MA at $4024.66, which is the next downside target. The low reached $4039 so far.

Quick analysis

The 200-hour moving averages serve as close-risk barometers for EURUSD and GBPUSD. If they stay below those levels, sellers can lean against them, with 1.1180 and 1.3391 as initial downside tests. A move back above the respective averages would weaken the bearish bias and risk breaking the downside momentum.

What this report measures

The Consumer Price Index tracks household spending on goods and services. Core CPI excludes food and energy. The three-month annualized rate shows the projected yearly increase if the latest three-month pace continued, and given Waller's comments, it could prompt a 50-bp hike in December. One could argue the Fed, absent the election, should have hiked in October but held off for political reasons. Nonetheless, the 12% probability for a 50-bp move remains low.