By Daniela Hathorn, senior market analyst at Capital.com
Yesterday’s CPI report delivered a sharp reality check for dovish hopes. The data confirmed that US inflation remains above target and, more importantly, is moving further away from it. The breakdown underscores just how entrenched price pressures have become—and they cannot be attributed solely to rising energy costs. Core services remain a larger contributor than energy, an especially uncomfortable signal for a central bank determined to return inflation to 2%. The reading all but confirms that the Federal Reserve will raise rates again, potentially as soon as its meeting in two weeks. Markets now see the probability of that outcome as a coin toss—a significant shift from the more dovish expectations that followed September’s softer labour-market data.
The initial market reaction to the hotter reading followed the expected script: yields and the dollar climbed, while equities and gold fell. Some of those moves have partially reversed this morning, particularly in bonds. With long-term yields already at multi-decade highs, the key question was whether investors still had the appetite to push rates higher or whether elevated yields would draw buyers back in. So far, the latter appears to be winning out. The picture for equities, however, is less encouraging. Asian stocks came under significant pressure overnight, while US futures point to a softer open. The headwinds remain familiar, led by concerns that returns on AI investment may fail to meet lofty expectations. Yet as borrowing costs rise and persistent inflation threatens profit margins, market anxiety is becoming increasingly palpable. For now, the outlook remains mildly constructive, but the bar is rising, placing greater pressure on companies to deliver both strong earnings and credible forward guidance. Tech companies therefore have a great deal to prove in the coming weeks if they are to continue supporting the broader market. With market breadth now extremely narrow, a disappointing earnings season for Big Tech and hyperscalers could come at a steep cost for global stock markets.
