CPI Surpasses Expectations, Raising Rate Hike Bets; U.S. Bonds Face Dual Challenges at 5% Threshold and Fiscal Concerns

On September 14, the U.S. August CPI showed renewed strength, with the unadjusted CPI rising 0.4% month-on-month and core CPI increasing 0.3%, both exceeding previous values. This has pushed the Federal Reserve's interest rate hike probability to nearly 90% this week. The market's real concern is no longer just a one-time adjustment of 25 basis points, but whether inflation has lost its downward momentum again. Prices for housing, airline tickets, education, and used cars have all risen simultaneously, coupled with a noticeable increase in energy costs, leading to core price pressures not easing as previously expected.

Energy factors are amplifying policy challenges. The situation in the Middle East continues to escalate, with Saudi Arabia taking preventive measures to close some oil pipelines, potentially further disrupting global oil supply; the Russia-Ukraine conflict has extended to refining and diesel supply, raising transportation and supply chain costs. This means that the energy shock is no longer just about oil prices themselves, but could create a second round of inflation through logistics, manufacturing, and consumer prices. If this pressure continues, even if the Federal Reserve hopes to maintain low interest rates, it will have to face the policy costs of rising inflation expectations.

On the other side are U.S. bonds and fiscal matters. The 10-year yield has approached 5%, with long-term rates driven by rate hike expectations, a massive deficit, and AI capital expenditures. Bessenet hopes to reduce the $40 trillion debt burden through economic growth, but the current growth rate in the U.S. and long-term demographic structure are insufficient to naturally alleviate fiscal pressure. Thus, the question is gradually shifting from "how to lower yields" to "how much economic growth does the U.S. need to support the continuously increasing debt and interest costs?"

For the asset market, this creates a more challenging combination: the Federal Reserve may tighten policy again, but long bonds may not necessarily receive support, as the market simultaneously demands higher term premiums to bear fiscal and inflation risks. If oil prices and core inflation remain elevated, rate hikes may only be the starting point for repricing; and even if the economy remains resilient, higher long-term rates will exert pressure through financing costs and asset valuations. What the market really needs to observe next is whether inflation can return to a downward trajectory and whether the U.S. can offset the long-term costs of high interest rates and fiscal expansion with sufficient productivity and economic growth.

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