14.10.2026 - Hot Inflation Report - Surprised?
US inflation accelerated in September, with the Consumer Price Index (CPI) with annual inflation rising 3.7%, up from 3.4% in August and above economists' expectations of 3.6%.
On a monthly basis, consumer prices increased 0.6%, in line with forecasts.
Core inflation, which excludes volatile food and energy prices, rose 0.3% month-on-month, 2.6% on a year-on-year basis, exceeding expectations of 0.2% and 2.5%, respectively.
Energy prices were the main contributor to the increase. The energy index surged 5.2% in September, amid ongoing disruptions to global energy supplies linked to the Middle East conflict.
Following the release, market-implied expectations for an October Federal Reserve rate hike increased to approximately 50%, reversing part of the decline seen after the weaker US employment report earlier this month.
Markets:
Equities: US stocks tank while European indices hold up fairly well
Bonds: yields jump - US 2y yield above 4.93% (from 4.80%!), US 10y yield above 5.31% (from 5.21%!), Japan 10y yield 3.00%
Commodities: Oil prices trading higher, WTI at USD 96/barrel and Brent around USD 106/barrel;
Precious metals moved lower, gold at USD 4’090/oz, silver below USD 57/ozCurrencies: US dollar sharply higher - Japanese Yen slightly weaker USDJPY 159
Cryptos: falling - Bitcoin around USD 82k
Volatility: The VIX index shows only little reaction, close to 16 (good opportunity for hedging!)
My View: Surprised? I am not.
For weeks, I have been among the few consistently arguing that the Federal Reserve would likely need to raise interest rates again in October.
Following the weaker US employment report earlier this month, investors quickly abandoned expectations of another rate hike. Once again, bad economic news was interpreted as good news for financial markets.
Today's inflation report has abruptly shifted expectations back towards another rate hike, with markets now pricing roughly a 50/50 probability of an October increase.
The bond market reacted immediately and decisively. Treasury yields surged, reflecting renewed concerns about persistent inflation and tighter monetary policy.
Equities have also moved lower, but I continue to believe that current valuations are far from reflecting the deteriorating underlying economic environment.
Elevated financing costs, rising consumer delinquencies, weakening sentiment, persistent inflation and increasing pressure on corporate financing costs are creating an increasingly dangerous combination.
Yet investors remain remarkably complacent. At some point, equity markets will have to digest the full extent of these developments. When that happens, the adjustment could be exceptionally painful.
A considerable share of today's market participants have little experience navigating prolonged inflation, structurally higher interest rates or a sustained bear market. Years of strong returns, abundant liquidity and rapid recoveries have encouraged excessive confidence and risk-taking.
The risk is that investors discover the true extent of their exposure only when liquidity disappears and markets begin adjusting violently.
Meanwhile, the fundamental situation is not improving. Oil prices continue to rise, and the conflict in the Middle East is spreading rather than easing. Intensifying Houthi attacks on energy infrastructure add another layer of risk to already strained global energy supplies.
Higher energy prices feed directly into transportation, production and consumer costs, creating additional inflationary pressure throughout the economy.
I see little reason to expect a meaningful easing of inflationary pressures in the near term.
This leaves the Federal Reserve in an increasingly difficult position: economic growth is weakening, but inflation remains too high.
Against this backdrop, another Federal Reserve rate hike may become increasingly difficult to avoid, despite the growing risks to economic activity.
One final observation: Investors should not change their entire market outlook with every new economic data release. Only days ago, markets were celebrating weak employment figures and dismissing the likelihood of further monetary tightening. Today, the narrative has reversed again.
Successful investing requires more than reacting to the latest headlines. Have a clear view. Have a clear strategy. Understand your risks. And above all, do not allow constantly changing market sentiment to dictate your investment decisions.
In my view, capital preservation and disciplined risk management remain far more important than chasing the final stages of an increasingly vulnerable equity market.
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