By: Daniela Hathorn, Senior Market Analyst at Capital.com
US equities came under renewed pressure on Tuesday after stronger-than-expected inflation data forced investors to reassess the Federal Reserve’s tightening path. A December rate hike now appears almost fully priced in, but the bigger concern is that markets may have underestimated how much further the Fed will need to go. Just last week, investors were questioning whether two additional hikes would be necessary; now, three are effectively priced in.
The possibility of a 50-basis-point increase in December has also entered the conversation, although it remains unlikely. Markets are assigning only around an 11% probability to a larger move, suggesting investors still expect the Fed to proceed in 25-basis-point increments. Recent hawkish comments from policymakers have reinforced expectations of further tightening, and with neither Waller nor Logan dissenting in favour of higher rates at the previous meeting, the reasonable response has been to price in a near-certain hike next month, even if there is not yet a clear consensus for accelerating the pace.
The most notable reaction, as expected, came in the bond market. The two-year Treasury yield jumped around 18 basis points, its biggest daily increase since the volatility surrounding the “Liberation Day” tariffs in April 2025, while the 10-year yield moved closer to 5%. This reflects more than expectations of a single December hike: investors are increasingly questioning where the terminal rate will settle, with the market shifting from doubting two additional hikes to pricing in roughly three. The speed of that repricing is creating fresh uncertainty for equities, particularly as higher yields raise borrowing costs and weigh on valuations.
As is often the case, the selloff has created fresh buying opportunities, with investors continuing to show appetite for stocks now that valuations have come down to more reasonable levels. The Asian session shrugged off some of these concerns, with major indices pushing higher, but the European open looks a little more fragile, even as US futures point to a firmer start. With the US bond market closed today for Veterans Day, investors may take advantage of the quieter calendar to reposition their portfolios after the recent volatility.
