How Will Higher-than-Expected Inflation Data Impact the Fed's Next Rate Decisions?

Summary

• The November 12, 2026 CPI print came in at 0.3% for the third consecutive month, marking an unacceptable number that was strong across all categories.
• The market reaction included an unwind of positioning, a reversal of nearly 50 basis points of previously priced-in rate hikes over the next year, and a re-evaluation of the Fed's reaction function.
• Fed Governor Waller indicated that a 50 basis point rate hike could be on the table contingent on a 0.3% CPI print, signaling increased hawkishness.
• Oil prices fell 15% in November following the October report, but the sell-off in rates was driven by multiple factors including corporate earnings, growth concerns, term premium debates, bond supply, and convexity selling.
• Midterm election results had a minimal first-order impact on the Fed's policy path compared to the CPI data, with rates moving almost three times more on the CPI morning print than during the entire midterms week.
• Ten-year bond yields retreated from 5.3% to 5%, and conditions are not expected to reassert themselves to push yields back to October highs due to the absence of the same combination of factors.
• A self-balancing system is emerging where higher rates could slow AI capital expenditure build-out, potentially limiting further yield increases.
• Convexity selling is defined as a situation where market selling forces create additional selling pressure, worsening market conditions as things deteriorate.
• The impact of higher yields on credit and equities depends on whether yields are driven by growth or by term premium and supply absorption worries.
• Higher rates act as a discount factor for low-leverage corporate bonds but create funding problems for highly leveraged companies.
• The current market is described as a one-factor market centered on mega-cap technology stocks.
• Investment strategy involves owning the mega-cap tech factor while renting insurance through out-of-the-money dollar puts and equity puts to create a carry-neutral or positive carry hedge portfolio.
• Future volatility is expected to stem from oil prices, Fed speak and minutes regarding the size and timing of rate hikes, and developments in the AI economy.