CPI Deals a Blow to US Bonds! 2-Year Yield Surges Over 20 Basis Points Intraday, Gold and Silver Plunge

In October, U.S. inflation once again exceeded market expectations, triggering a sell-off in U.S. Treasury bonds and a sharp rise in yields across the board. The strengthening U.S. dollar and heightened expectations for higher interest rates also put pressure on gold and silver. With Federal Reserve officials repeatedly sending hawkish signals, markets are not only increasingly betting on a rate hike in December but are also beginning to assess the possibility of a larger hike and further monetary policy tightening into next year.

On Tuesday, U.S. Eastern Time, after the release of the U.S. CPI data, U.S. Treasuries were heavily sold, sending prices plunging and yields accelerating higher. The benchmark 10-year U.S. Treasury yield expanded its gains following the CPI release and, after remarks by Federal Reserve official Lorie Logan, briefly broke above 5.01% during the U.S. stock market midday session, rising more than 10 basis points on the day. The 2-year Treasury yield, which is more sensitive to Fed policy expectations, climbed even more, surpassing 4.77% during midday and jumping more than 20 basis points on the day, on course for its biggest single-day surge since April last year.

Precious metals markets also came under pressure. After the U.S. CPI release, gold extended its losses during the session. In the U.S. stock market midday, New York gold futures hit an intraday low of $4,020.8 per ounce, dropping nearly 2.3% on the day; spot gold fell below $4,014 per ounce, down nearly 3.1% intraday. The decline in silver was even more pronounced. Market data shows that at the day's lows in New York's midday, silver futures fell nearly 3% intraday, while spot silver plunged over 4%.

CPI Inflation Continues to Beat Expectations for Months, Bond Market Reprices Fed Policy Path

The U.S. Bureau of Labor Statistics reported on Tuesday that October CPI rose 0.4% month-on-month, higher than the market expectation of 0.3%, but slowed from 0.6% in September. Core CPI, which excludes food and energy prices, also rose 0.3% month-on-month, surpassing expectations of 0.2% and matching September’s increase. This marks the third consecutive month of 0.3% gains for core CPI. Due to the U.S. federal government shutdown at the same time last year, which prevented data collection, the Bureau did not release year-on-year CPI data for October.

Just hours before the CPI data was released, the market was already rattled by hawkish remarks from Fed Governor Christopher Waller.

In a speech in London on Tuesday, Waller said that even if inflation improved in October, he would still be inclined to support a 25 basis point Fed rate hike in December. However, if core CPI reached 0.3% or higher for a third straight month, the Fed should consider a 50 basis point hike in December. He warned that raising rates by only 25 basis points could undermine the credibility of the Fed’s fight against inflation.

The actual core CPI published hit Waller’s 0.3% threshold precisely. After the data release, markets quickly ramped up bets on a larger rate hike. Reuters reported that traders’ implied probability of a 50 basis point hike by the Fed in December spiked to about 13.6%, from near zero before the data was released; by contrast, a 25 basis point hike had already become the mainstream market expectation.

According to Bloomberg, the inflation data triggered a sell-off in Treasuries, with short-term maturities bearing the brunt. Money markets also increased bets that the Fed will hike rates at least two more times by mid-2027, and began more clearly pricing in the possibility of a one-off 50 basis point hike in December.

Lindsay Rosner, Head of Multi-Sector Fixed Income Investing at Goldman Sachs Asset Management, said that if CPI remains robust, the Fed may usher in a more aggressive tightening cycle. Her view reflects market worries over persistently high inflation: even if a December hike is now the baseline expectation, future policy rates could still be more hawkish than previously anticipated.

This Year’s FOMC Voter Logan: Faster Rate Hikes May Be Needed This Winter, Fed Needs at Least Two More 25 Basis Point Hikes Before a Pause

Following the CPI release, Dallas Fed President Lorie Logan also sent further signals of policy tightening. Logan is a voting member of the FOMC this year. Speaking at an energy conference co-hosted by the Dallas Fed and the Kansas City Fed on Tuesday, she said that given current economic and inflation prospects, the Fed still needs to implement at least two additional 25 basis point hikes.

Logan noted that the specific pace of hikes depends on the near-term economic and financial environment, and that the Fed might need to move faster this winter than it has this autumn. She stated, "It may be necessary this winter to act more quickly than the FOMC has so far this autumn."

However, Logan is not advocating for continuous rate hikes. She said that after completing these two hikes, the Fed could pause to assess the economy and financial markets before deciding on further policy adjustments. She also emphasized that if inflation remains above target for an extended period, it could gradually become entrenched in business and household expectations, making timely action crucial.

Logan’s comments signal that some Fed officials are discussing not just whether to hike rates in December, but also how to reach a moderately restrictive level more quickly. Her statements echoed Waller’s, further fueling market concerns about the Fed tightening policy even more over the coming months.

U.S. Treasury Yields and Dollar Rise Together, Doubling Pressure on Gold and Silver

Both U.S. Treasury yields and the dollar are strengthening, putting pressure on non-yielding precious metals. On one hand, higher bond yields increase the opportunity cost of holding non-interest-bearing assets like gold and silver; on the other hand, a stronger dollar makes dollar-denominated precious metals more expensive for holders of other currencies.

According to Reuters, after October inflation data came in higher than expected, gold prices fell noticeably as the market began evaluating the chances of the Fed taking a more aggressive rate-hiking stance. Gold is especially sensitive to changes in interest rate expectations, and if the market further raises its outlook for policy rates, precious metals could continue to face pressure in the short term.

However, the future path for gold and silver will not depend solely on Fed policy. Movements in the dollar, geopolitical risks, energy prices, and investors’ outlook on the economy can all affect demand for precious metals. The key market shift currently is that both the inflation data and hawkish comments from Fed officials have reinforced expectations for higher rates, forcing a reset in precious metals trades that previously benefited from rate-cut expectations.