Inflation obsession takes center stage, if only for a day

Markets

The S&P 500 slipped slightly from its record high as stubborn inflation reignited hawkish chatter in some corners of Wall Street, putting pressure on stocks. The inflation obsession has dramatically returned, with Fed member Raphael Bostic laying the groundwork for a potential Fed November pause. While inflation did overshoot expectations month-to-month, driven by rising food costs, the annual increase was the smallest in over 3.5 years—keeping traders mostly confident (with an 83% chance) that a Fed rate cut is still on the table for next month. Yet, whispers of a pause are now creeping in, with those odds climbing to 13%.

So, while investors got a pre-Halloween inflation scare, they largely brushed it off. It seems it’ll take more than a mild inflation hiccup to derail the Fed’s trajectory—at least from where traders are sitting. The inflation bump in the night isn't spooking anyone just yet, and the rate-cut narrative remains in place for now.

But if you've been around the rates game long enough, you know how this story can unfold. It always starts with a subtle uptick in inflation, a seemingly innocuous repricing of rates, and a few hawkish remarks from key Fed members. Before you know it, the "pause" narrative goes full throttle, and what looked like a sure bet for rate cuts suddenly gets much more complicated. Right on cue, after hotter-than-expected CPI numbers, Atlanta Fed President Raphael Bostic hinted to The Wall Street Journal that he's leaning towards standing pat in November, saying, “This choppiness tells me maybe we should hit pause. I’m definitely open to it.”

If there’s any silver lining, shelter costs slowed sharply—a big deal since housing has been the central sticking point for inflation. We’re still in the early stages of the Fed’s easing cycle, where data can be all over the place, but it's clear the days of CPI sparking high-octane market moves are behind us. The FX market barely flinched, and some currencies, like the yen, even rallied ( more on that in my FX note later today). To me, it’s a sign that the inflation narrative might be losing its tug on traders’ strings, at least for now.

That said, it's still hard to spin the hotter CPI print as anything but unwelcome news.

Back-to-back inflation surprises in core CPI have put the Fed's aggressive easing cycle back under the microscope. It’s not the picture the Fed wanted after its bold September move, and now the November cut may hinge entirely on whether we get another strong jobs report.

Just when you thought the inflation genie was back in the bottle, the tug-of-war between inflation and rate-cut bets is gearing up for another round.

Asia open

Asian investors are waking up to a final trading day drenched in uncertainty, with sentiment slightly bruised by unexpectedly sticky U.S. inflation. The air is thick with caution as markets eagerly await Saturday’s much-hyped announcement on China’s stimulus plans.

Wall Street took only a minor dip on Thursday, with losses softened by surprisingly soft weekly jobless claims, fueling the narrative that the Fed is still on track to slice interest rates by another 50 basis points this year. It seems the downside was padded by the idea that the Fed’s dovish tilt isn’t going anywhere just yet.

As for Asia, don’t expect much direction from Treasuries or the dollar—both barely budged. The greenback finished the day flat, while yields stayed in a tight range, offering little guidance. With few clear signals from U.S. markets, Asian traders might find themselves flying solo, waiting for Saturday’s fiscal firepower.

Looking ahead to Saturday, all eyes will be on Beijing as China’s finance ministry is set to unveil its much-anticipated fiscal stimulus plans to revive the economy. There are plenty of reasons the Party might have scheduled it for the weekend, but one theory gaining traction is that Beijing wanted to drop the news while markets were closed, giving China’s notoriously emotional retail investors a day to digest any potential disappointment if the Ministry of Finance merely kicks the stimulus can down the road.

This latest approach to supporting equity markets raises more questions than answers. Will Beijing announce fresh fiscal steps to reignite growth, or will they rehash recent measures with more details?

Hope—and let's be honest, a fair bit of expectation—is riding on Beijing unveiling something big. But if the much-anticipated fiscal reveal turns out to be more talk than action, investors could be in for a brutal Monday wake-up call. In that scenario, the blistering rally in Chinese stocks over the past two weeks could completely unravel in spectacular fashion. Without real cash hitting the table, this rebound risks becoming yet another false dawn in a long string of market letdowns. Investors want fireworks, not just a spark—and anything less could send them running for the exits.

Oil markets

Oil prices climbed as traders rushed to hedge against major tail risks. On one end, there are persistent fears of a potential confrontation between Israel and Iran, which could disrupt Middle East crude flows, sending shockwaves through the oil market. On the other, a more positive tail risk is brewing—the real possibility that China might finally unleash some much-needed fiscal firepower over the weekend, which has been conspicuously absent from Beijing’s stimulus toolkit so far. Both factors have oil traders positioning for what could be a volatile open on Monday.