US inflation pushes up US Treasury yields, but European interest rates are unlikely to follow blindly

(1) US inflation data unexpectedly rose, leading to a rapid sell-off in US Treasuries, with the 10-year Treasury yield returning to 5%. Institutions believe this trend is reasonable. (2) Core CPI increased by 0.3% month-on-month, which is well above 3% on an annualized basis and deviates from the Fed's target. Together with extra uncertainty introduced by energy prices and artificial intelligence investment, the market has reason to remain tense. (3) Last week's solid employment report also left the Fed with little reason to take a more dovish stance. (4) After Federal Reserve Governor Waller expressed support for a 25-basis-point rate hike in December and the possibility of a 50-basis-point move, the 10-year Treasury yield rose by 6 basis points and the 2-year yield increased by 13 basis points. (5) The market is currently more than fully pricing in a 25-basis-point rate hike in December, which is consistent with institutions' own forecasts. (6) Expectations of an easing Middle East situation have driven energy costs lower, with US retail gasoline prices dropping below $4 per gallon for the first time since mid-July. This may help keep November inflation data moderate, but that data will not be published until the day after the Fed's December meeting. (7) Institutions anticipate no further rate hikes in 2027, as interest-rate-sensitive industries are cooling further, housing and energy costs are falling, and sluggish wage growth will constrain price pressures. (8) Euro and sterling rates have quickly repriced in line with the Fed’s hawkishness, but institutions believe these trends may soon reverse. On the day, the 2-year euro inflation swap dropped, indicating that spillover effects are reflected only in real rates. (9) There is a marked divergence between US and European inflation trajectories: Europe is more sensitive to energy prices, while the US is more affected by AI-related growth. If oil prices drive the rise, it is reasonable for US and European interest rates to be closely correlated; if triggered by macroeconomic data, this correlation is less likely. (10) Rising US rates mean tighter financial conditions in Europe. The ECB or Bank of England may not need to act as aggressively as currently priced in, and many ECB officials have already associated the rise in long-term rates with a reduced need for rate hikes. (11) As a result, institutions prefer to focus on Europe's own inflation data rather than be swayed by unexpected US CPI moves. (12) Wednesday's economic calendar is relatively quiet, and US holidays may dampen trading activity. More attention should be given to speeches by several ECB officials— including Cipollone, Kazaks, Nagel, and Lagarde— as well as the UK's issuance of £1 billion of government bonds and Germany's auction of a total of €2.5 billion in 30-year and 21-year government bonds.