It turns out Wall Street needs to keep worrying about interest rates, after all.
After weeks of tuning out the Federal Reserve to focus on cracks in the artificial-intelligence trade, investors were greeted Tuesday with a one-two punch of hot inflation data and hawkish remarks from a key Fed official.
Fed governor Christopher Waller struck first, warning that he could support a larger-than-normal 0.5 percentage point rate increase in December if Tuesday's consumer-price index report showed core prices rising 0.3% from the previous month. Then came that very CPI report, which laid out that very scenario. Bond prices tumbled, and investors scrambled to reset odds of future rate increases.
"Waller's comments really laid the groundwork for pretty substantial market-sensitivity to an upside surprise, and that's what we got," said Zach Griffiths, head of investment-grade and macro strategy at the research firm CreditSights.
By late Tuesday, falling bond prices had carried the yield on the 2-year Treasury note to its biggest one-day jump in 19 months. Ten-year Treasury yields surged back above 5%. Stock indexes wavered, then buckled.
The latest inflation data provided strong evidence that investors will need to wrestle with competing threats simultaneously. Wall Street has grown increasingly wary that demand hiccups or a public backlash against data centers might trigger a slowdown in the historic boom in AI infrastructure investment. At the same time, that boom is helping to keep inflation elevated in the here and now -- raising the risk that the Fed will raise rates not just once more in December but at least a few more times after that.
