Hot US inflation data revives Fed rate hike bets

The April CPI print delivered an unwelcome shock to fixed-income markets and risk assets. Headline inflationThe rate at which prices rise across an economy. climbed to 3.7% year-over-year while core CPI held above 2.7%, both driven by surging energy costs amplified by the Iran war and ongoing Strait of Hormuz disruptions. For months, markets had priced in a base case of Fed rate cuts beginning in mid-2026; Tuesday's data upended that narrative within hours.

Bond yields surged across the curve as traders loaded into rate hike wagers. Treasury futures repriced to reflect near-zero probability of cuts through year-end, with some models now assigning non-trivial odds to a surprise hike if inflationThe rate at which prices rise across an economy. remains sticky. Goldman Sachs reiterated that energy shocks will keep yields elevated and support dollar strength even if growth softens. Morgan Stanley Chief US Economist now expects inflation to peak in May or June rather than rolling over, implying the Fed's rate-hold posture could shift to hawkish if subsequent prints remain hot. ECB officials, including Bundesbank President Joachim Nagel, are already signaling rate hike likelihood if the energy crisis drags on.

Equity markets repriced immediately. Tech stocks, which thrive in low-rate environments, sold off hardest; the Nasdaq Composite fell 0.87% on May 13 with semiconductor names like NVIDIA and Broadcom leading declines. Banking and financial stocks, typically buoyant under higher-for-longer rate regimes, posted modest gains as net interest margin expansion offsets credit concerns. Gold fell on rising real yields, while the US dollar index strengthened as higher-for-longer US rates attract foreign capital. Oil and energy exporters held firm as elevated commodity prices offset equity valuation headwinds.

The bull case for faster disinflation still exists. Energy prices, while elevated, are already partially priced in, and base effects will roll off by Q3. A de-escalation in the Middle East would immediately unlock supply and reverse commodity shocks. The Fed's implicit flexibility on timing suggests policymakers will not mechanically hike; instead, they will likely extend the hold through year-end and resume cuts once inflationThe rate at which prices rise across an economy. evidently moderates. However, if another CPI beat shocks markets in June or July, the pause could extend into 2027, forcing a prolonged repricing of terminal rates that could trigger broader equity volatility.