UBS sees limited support for a 50bp Fed hike in December despite hot October CPI

With futures pricing slightly more than a full quarter-point hike for December, the 50bp debate is now a tail risk the market will react to on any Fed speaker headline. Treasury yields close to 5% keep the dollar supported, including against the yen ahead of the Bank of Japan’s own expected December hike, which leaves the US-Japan rate gap a key driver of USD/JPY. Higher real yields are also a headwind for gold, which has tended to trade on Fed hike expectations rather than as a safe haven this year. For equities, the combination of firmer inflation and rising long-end yields adds pressure to richly valued tech shares, which are already dealing with the Nvidia leadership shock.--- October’s inflation report makes a December Fed hike look all but certain, and UBS thinks the real risk is a faster run of quarter-point moves rather than one big step.Summary:US October CPI rose 0.4% m/m (forecast 0.3%) and core rose 0.3% (forecast 0.2%), with broad price gainsThe 10-year Treasury yield rose 11bp to close to 5% and the S&P 500 fell 0.4% on TuesdayFed Governor Waller said before the data that core at 0.3% or more could warrant considering a 50bp December hike, and Dallas Fed President Logan favors at least two more 25bp hikesFed funds futures price about 28bp of hikes for DecemberUBS sees limited FOMC support for 50bp and keeps its base case of 25bp hikes in December and MarchThree-month annualized core inflation rose to about 3.75%, and tariff-sensitive and IT goods prices stayed firm A hotter than expected US inflation report has put an unusual question in front of the Federal Reserve: whether its next hike should be a double-sized one. UBS thinks the answer is still no. But the bank says October’s data strengthen the case for at least two more quarter-point increases and raise the risk that they come faster.Headline consumer prices rose 0.4% in October, above the 0.3% forecast. Core prices, which exclude food and energy, rose 0.3% against expectations of 0.2%. Price gains were broad, covering food, housing, recreation, medical care, electricity, airfares and delivery services. The 10-year Treasury yield jumped 11 basis points to close to 5%, and the S&P 500 fell 0.4% on Tuesday.The 50 basis point idea came from Fed Governor Christopher Waller. Before the release, he said a core reading of around 0.3% or more could justify considering a half-point move in December.Fed's Waller says a half-point rate hike in December may be needed if Core CPI comes in hot Separately, Dallas Fed President Lorie Logan said she favors at least two more quarter-point hikes and suggested the Fed could move more quickly this winter. Fed's Logan: It's clear that Fed needs at least two more quarter-point rate hikesFed funds futures now price about 28 basis points of tightening for December. That implies a full quarter-point hike and only a small chance of something larger.UBS argues that appetite on the rate-setting committee for a 50 basis point move is limited. The bank said a hike of that size could signal that policy is well below where it needs to be and make the tightening cycle look open-ended. Its base case remains quarter-point hikes in December and March.The detail behind the headline numbers explains the concern. Monthly core inflation edged down to 0.30% from 0.33%, but the three-month annualized pace rose to about 3.75%, from below 2% as recently as August. Excluding used cars, which fell 1.2%, core goods prices rose around 0.4%. Tariff-sensitive items such as toys, furniture and bedding, and appliances each rose more than 1%, and IT hardware prices climbed 0.4%. UBS noted that those categories carry larger weights in the Fed’s preferred PCE gauge than in CPI. It said goods disinflation looks a less reliable theme heading into 2027.Shelter inflation slowed to 0.30% from 0.39% but remains sticky. Energy rose a further 0.7%, although its contribution to the headline figure faded. After two disappointing reports in a row, the December debate is now about the size of the move, not whether one comes. ----Its been a long year, final FOMC meeting coming up in 3 weeks: This article was written by Eamonn Sheridan at investinglive.com.