October inflation sealed a December Fed hike. The argument now is 25 or 50 basis points

What October's numbers said

October's inflation report settled one question and opened another. Headline consumer prices rose 0.4% in October and core prices rose 0.3%, both stronger than expected, and the numbers landed hard enough to move markets the same day: the 10-year Treasury yield rose 11 basis points to 4.99%, the two-year yield rose about 18 basis points to 4.74%, and the S&P 500 fell 0.4% on Tuesday. The three-month annualised core inflation rate climbed to 3.75%. m:…7741 m:…0081

The details underneath the headline were mixed. Tariff-sensitive categories such as toys, furniture and appliances rose by more than 1% in the month, while used-car prices fell 1.2%. The labour market, meanwhile, kept cooling without breaking: October payrolls rose by 165,000, the three-month average is 137,000, unemployment slipped to 4.1%, and average hourly earnings rose 3.1% over the year, though ABN AMRO notes real wages are currently falling. m:…7741 m:…5124

The 50-basis-point question

The question now is not whether the Federal Reserve moves in December but by how much. Governor Christopher Waller has said a 50-basis-point increase should be considered if monthly core inflation stays around 0.3%, and October's 0.3% reading puts that condition squarely in play. Dallas Fed President Lorie Logan has called for at least two more 25-basis-point increases. Federal funds futures markets price 28 basis points of hikes for December, more than a quarter point and less than a half. m:…7741

ABN AMRO's answer is in its title: the data seal the hike, not the jumbo. The bank expects a 25-basis-point increase on 9 December, arguing that inflation is persistent but not accelerating and that the labour market shows no wage-price spiral. One more data point arrives after the decision, not before it: the November CPI report is scheduled for publication on 10 December, a day after the Fed is expected to move. m:…5124

What the big houses now expect

The big asset managers are converging on the same path, with different second steps. UBS keeps a base case of 25-basis-point hikes in December and March. PIMCO, after the October data, now forecasts 25-basis-point increases in December and January. Both houses are describing a short series of quarter-point moves, not a return to the aggressive tightening of 2022. m:…7741 m:…1894

PIMCO's case for calm rests on the drivers. Higher input costs from energy, chips, tariffs and shipping are being passed through to consumers, the firm says, but wage-cost pressures have not reaccelerated to 2021 or 2022 levels, and roughly 70% to 80% of the expected pass-through of energy costs has already happened. The firm expects US inflation to fall materially in 2027. The current federal funds range sits roughly 100 basis points below PIMCO's estimated Taylor-rule rate, which is why the firm sees the coming hikes as a recalibration rather than a new cycle. m:…1894

Why this is not 2022

Markets, meanwhile, are pricing a split picture. ING notes that investors fear near-term inflation risks while still viewing structural inflation as benign: the five-year, five-year-forward euro inflation swap sits at 2.07%, below the roughly 2.4% level seen before the financial crisis. ABN AMRO puts the US five-year, five-year-forward breakeven at 2.15% after the CPI release. The read-through is that nobody expects inflation to run away, but nobody expects it to fade quietly either. m:…8148 m:…5124

For anyone setting budgets or borrowing costs, the practical point is the shape of the path: a quarter point in December, another in January, and a Fed that is reacting to data rather than leading it. PIMCO expects US inflation to fall materially in 2027. PIMCO adds two warnings worth watching: Iran-related shipping disruptions may amplify inflationary pressures, and holiday discounting may be smaller than usual because of shipping disruptions and inventory constraints. The December decision will be made on October's data, not November's. m:…1894