NEW YORK — The September consumer price index, seen as the final hurdle before the Federal Reserve's Oct. 27-28 policy meeting, rose faster than markets had expected. Because the Fed raised its benchmark rate at its Sept. 15-16 meeting for the first time in three years and two months, investors who had leaned toward a hold this month can no longer be confident. Gasoline and diesel prices in the U.S. have jumped since last month after Yemen's pro-Iran Houthi rebels struck Saudi Arabia and Ukraine attacked Russian oil facilities, adding to overall inflation. Because government bond yields had already surged before the Fed's rate increase, interest costs for governments are rising and funding for big technology companies investing in artificial intelligence has run into trouble. Even large Wall Street banks, which had been propped up by the stock market boom, could not escape weakness in bond trading. With the U.S. midterm elections on Nov. 3 just ahead, another rate increase would put political pressure on President Donald Trump.
September CPI Rises 3.7%, Above Forecasts; Fed Beige Book Cites Oil Impact in Every District
The Bureau of Labor Statistics said on the 14th that the September CPI rose 3.7% from a year earlier, above the 3.6% expected by economists polled by Dow Jones. Prices rose 0.6% from August, the steepest monthly gain in five months since April. Core CPI, which excludes volatile energy and food, rose 2.6% from September last year and 0.3% from August, each 0.1 percentage point above forecasts of 2.5% and 0.2%.
The bureau said gasoline prices rose 9.1% last month, accounting for more than half of the overall monthly increase. Gasoline prices were up 34.2% from a year earlier. Fuel oil jumped 15.3% from August and 74.2% from a year earlier. Energy commodity prices, combining gasoline and fuel oil, rose 9.3% from August and 35.3% from a year earlier. Excluding food and energy, major service and goods prices also rose broadly, including airline fares (1.2%), used cars and trucks (0.7%), education (0.6%) and apparel (0.3%).
The Fed's October Beige Book, released the same day, said the impact of higher oil prices appeared in reports from all districts and that businesses reported passing along rising costs from high diesel prices and fuel surcharges across supply chains. The average U.S. retail diesel price hit a record $6.52 a gallon on Sept. 22. It had eased to $6.27 as of Oct. 12 but remains well above normal levels. With rising diesel prices threatening to become a major liability in the midterm elections, Trump took the drastic step on Oct. 9 of easing sanctions on Russian diesel in talks with Russian President Vladimir Putin.
According to the Fed, prices rose strongly in three of the 12 Federal Reserve districts. Prices increased moderately in eight districts and slightly in one. In three of the eight districts with moderate increases, cost pressures on businesses intensified or strengthened. The Beige Book said business contacts in several districts noted continued price pressures from other commodity prices, tariffs and insurance premiums. That was consistent with the September CPI data.
With consumers reacting sensitively to price increases, businesses have been unable to pass higher costs fully into selling prices. Labor markets were broadly unchanged, though there were some signs of reduced hiring needs tied to the adoption of AI. In five districts, some companies cut staff or delayed hiring because of productivity gains from AI investment. Those firms expected slower job creation ahead.
The Beige Book is an economic report compiled by the 12 regional Federal Reserve banks, which contact banks, businesses and experts in their districts to gather recent economic trends. It is typically released two weeks before the policy-setting Federal Open Market Committee meeting.
After the stronger-than-expected inflation data, New York stocks fell on the 14th, with the Dow Jones industrial average down 0.09%, the Standard & Poor's 500 down 1.11% and the Nasdaq composite down 1.88%. The yield on the 10-year U.S. Treasury note, the global bond market benchmark, climbed as high as 4.329% during the session. The two-year yield, which is sensitive to monetary policy, rose to 4.952%, nearing 5%.
French Yields Up 1.35 Points This Year; Advanced-Economy Debt Climbs $3.9 Trillion
As price pressures prolong high interest rates, governments, industry and the financial sector are all struggling. Daniel Ivascyn, chief investment officer at Pimco, the world's largest bond manager, told the Financial Times on the 11th that weeks of heavy bond selling had left hedge funds and others forced to unwind losing bond positions. Ivascyn said the 10-year U.S. Treasury yield could reach 6% for the first time since 2000. He warned that a surge in government bond yields would raise mortgage burdens for U.S. households and could deal a severe blow to risk assets including equities, and that a vicious cycle of bond selling by real estate investment trusts and others could emerge. He added that if the 10-year yield rose above 5.5%, credit and equity markets and other risk-asset segments would show considerable weakness, noting that bond issuance yields for the lowest-rated companies had climbed to 17% this month, the highest since May 2020.
On government debt, Fitch, one of the three major global credit rating agencies, said in a report the same day that rising sovereign yields have made it harder for major advanced economies including the U.S., France and the U.K. to keep their debt burdens stable. According to Fitch, 10-year yields across the 10 largest advanced economies have risen an average of 0.81 percentage point this year. France, facing a severe fiscal crisis, posted the largest increase at 1.35 percentage points, followed by Italy at 1.08 percentage points, the U.S. at 1.06 percentage points, Japan at 0.94 percentage point and the U.K. at 0.94 percentage point.
Fitch further projected that government debt in advanced economies would rise by $3.9 trillion to $75.4 trillion by the end of this year, reaching 102% of gross domestic product. That is sharply higher than $26 trillion, or 68% of GDP, two decades ago. The report said many of the 10 largest advanced economies must sharply improve their primary budget balances, which exclude interest costs, to stabilize debt ratios, warning that France would need to narrow its budget deficit from an expected 2.9% of GDP this year to about 0.4%.
The International Monetary Fund also pointed on the 13th in its World Economic Outlook to sovereign yields in major economies climbing to multi-decade highs, saying the task of rebuilding government finances is urgent. According to the FT, the combined fiscal deficit, or net borrowing, of the 41 economies the IMF classifies as advanced will reach 5.2% of GDP this year, the highest since 2021 during the COVID-19 pandemic. U.S. net borrowing is projected at 8.5% of GDP this year, up from 7.1% last year, while China's is expected to reach or exceed 8%. The IMF figure for the U.S. includes state and local government borrowing, making it far higher than the 5.8% federal deficit ratio projected by the Congressional Budget Office in February.
The IMF also said the number of countries accounting for 95% of global growth fell to 32 from 54 in April. That indicates that economic growth is becoming more concentrated in a handful of countries as AI development accelerates. The IMF warned that as fiscal costs rise and electoral pressures build, central banks could again face demands to accommodate more public borrowing or to tolerate inflation above target.
Wall Street Banks Post Weak Bond Results; CoreWeave Bond Yield Jumps to 15%
With U.S. Treasury yields running high, large Wall Street banks' third-quarter bond trading results took a direct hit. JPMorgan Chase, the largest U.S. bank, opened the earnings season on the 13th with third-quarter revenue of $50.91 billion and earnings per share of $5.57, both short of market expectations of $51.22 billion and $5.90. The miss was unusual given that JPMorgan has beaten EPS expectations in 16 of the past 20 quarters.
The decline stemmed from bond-related revenue falling short of expectations as bond prices fell. Fixed-income trading revenue came in at $5.4 billion, $550 million below forecasts — a larger shortfall than the $310 million by which total revenue missed estimates. Total expenses came to $27.3 billion, $90 million more than expected. Revenue rose only 8% from a year earlier while expenses increased 12%, worsening results.
Wells Fargo also disappointed investors the same day, reporting third-quarter revenue of $21.87 billion against market expectations of $22.3 billion. Its third-quarter EPS of $1.87 narrowly beat the $1.85 forecast. Wells Fargo's bond trading revenue of $1.26 billion also fell well short of the $1.41 billion expected, hurting overall results. That was down 7% from a year earlier and 18% from the prior quarter. Equity trading revenue rose 21%, but the weakness in bond trading eroded much of that gain.
Goldman Sachs fared better, reporting third-quarter revenue of $18.68 billion and EPS of $17.01, beating forecasts of $16.4 billion and $13.50. Equity trading revenue surged 72% from a year earlier to $6.44 billion, but bond trading revenue slipped about 1% from a year earlier to $3.47 billion, missing market expectations by $239 million.
Citigroup posted third-quarter revenue of $23.85 billion and EPS of $2.85, beating forecasts of $23.72 billion and $2.66. Bond trading revenue rose only 4% from a year earlier to $4.4 billion, markedly slower growth than in equities trading (14%), services (15%), investment banking (9%) and wealth management (15%).
Bank of America reported on the 14th third-quarter revenue of $30.12 billion and EPS of $0.91, both below market expectations of $30.69 billion and $1.10. BofA was also hit hard by bond trading revenue of $2.55 billion, down 17% from a year earlier and short of the $3 billion forecast. On the 13th, the U.S. Treasury Department fined BofA $1.2 billion (about 1.6 trillion won) for failing to act on a suspected Chinese money laundering network and suspicious illicit financial transactions along the southern U.S. border. In a statement, BofA said it had committed billions of dollars and thousands of people to fighting financial crime, and that the penalty reduced third-quarter EPS by $0.17.
Morgan Stanley also beat expectations with revenue of $20.34 billion and EPS of $3.03, against forecasts of $19.9 billion and $2.94, but its bond results fell 7% from a year earlier. Bond trading revenue of $2.01 billion missed the $2.16 billion forecast. JPMorgan Chief Executive Jamie Dimon warned on the 13th that a one-percentage-point rise in interest rates would be more painful.
Chip CEOs Call Funding the Biggest Problem as Fed Weighs Policy Before Midterms
Rising rates are also unnerving an AI industry that has taken on enormous debt to fund infrastructure. In the bond market on the 14th, the yield on 2032 notes issued by CoreWeave — an AI cloud company that builds data centers with heavy borrowing and leases them to big technology firms — jumped to 14.8%. According to Bloomberg, the bonds, sold at par four months ago, fell below 78 cents on the dollar, effectively classifying them as distressed debt. The probability of default within five years implied by credit default swap prices also topped 50%. As bond prices fell, CoreWeave shares plunged 15.46%. Oracle and Nebius, which have similar business models, tumbled 8.83% and 10.08%, and the Philadelphia Semiconductor Index fell 4.30%. In a memo to employees, CoreWeave CEO Michael Intrator pushed back, saying there are times when the market misunderstands and moves irrationally, and that the company's order backlog more than covers all of its debt.
Pullbacks in capital investment driven by higher bond yields are already widespread across the AI investment landscape. According to the FT on the 12th, Morgan Stanley counted $23 billion in new AI-related debt raised worldwide last month, more than halving from August. New AI-related debt issuance has declined steadily since reaching $113 billion in June. In the U.S. investment-grade bond market, where big technology companies raised $306 billion from January through August, AI-related corporate bond issuance effectively halted last month. AI-related debt so far this year totals $466 billion, more than four times the $101 billion in the same period last year.
Broadcom CEO Hock Tan said at the DBS Asian Future Forward conference in Singapore on the 12th that the current memory chip shortage could look different a year from now, but worried that capital may be the biggest constraint. Intel CEO Lip-Bu Tan said the most urgent issue was the rising cost of capital, adding that investors' demand to see returns on invested capital was also a challenge. CNBC said that if higher rates raise infrastructure investment costs, the cost of building data centers and buying advanced chips will also rise, potentially dealing a major blow to the profitability of AI projects.
With prices climbing relentlessly even amid high rates, doubts are spreading quickly in the market that the Fed may not hold rates steady this month. On the ICE Futures exchange in London, Brent crude for December delivery rose 0.35% to $106.06, while West Texas Intermediate for November delivery on the New York Mercantile Exchange gained 1.01% to $95.09. WTI has now risen for five straight sessions. In its monthly oil market report, the International Energy Agency said supply may fail to keep pace with demand into next year because of the Middle East crisis, despite the U.S. easing of sanctions on Russian diesel and strategic reserve releases by various governments.
According to CME FedWatch, the federal funds futures market raised the odds of a Fed rate increase this month to 33.2% from 22.1% the previous day. The probability of a hold fell to 66.8% from 77.9%. The only major data the Fed will see before the Oct. 27-28 meeting is the September producer price index, due on the 15th. The September personal consumption expenditures price index, the Fed's preferred inflation gauge, is due on the 29th, after the meeting.
Amid the turmoil in market rates and prices, Fed officials have offered diverging views. Beth Hammack, president of the Cleveland Fed and one of the central bank's leading hawks, said in a speech on the 12th at the National Association for Business Economics annual meeting in Cleveland that while higher gasoline and diesel prices had drawn attention this year, they were not the whole story, and argued that adjusting rates in small increments more frequently, rather than in large moves at once, helps prevent inflation from becoming entrenched. By contrast, New York Fed President John Williams, seen as relatively dovish within the Fed, said in a Bloomberg interview on the 13th that his view that one more rate increase could be appropriate had not changed, and that for now he did not think further increases would be needed next year. The New York Fed president is considered the Fed's effective No. 2 as the only regional bank head with a permanent FOMC vote.
With no clear catalyst in sight to bring inflation down, the risk has grown that government finances, Wall Street earnings, the stock market rally and AI funding will all be affected in turn. Of particular concern is that Trump's impatience to see rates fall, at least before the midterm elections, could grow as well. The Fed, too, faces a deeper dilemma over the timing of any further rate increase, caught between price stability and mounting fiscal and investment burdens.
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