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US inflation outlook: Dollar and Treasury yields jump as CPI demands more Fed tightening

By Piero Cingari


Mayor of Boston, Kevin White, points to a chart showing inflation costs, Boston, Massachusetts, 25th September 1978. (Photo by Barbara Alper/Getty Images)
Mayor of Boston, Kevin White, points to a chart showing inflation costs, Boston, Massachusetts, 25th September 1978. (Photo by Barbara Alper/Getty Images)

Main Street consumer inflation = Wall Street asset deflation, has been the theme of 2022 so far, and the latest US CPI reading appears to keep this trend well alive and kicking.

In September 2022, the US CPI inflation rate increased 8.2% year on year (up 0.4% month on month), a tad lower from 8.3% in August but above expectations of an 8.1% y/y (0.2% m/m) increase.

Core inflation, which excludes energy and food from the CPI basket, increased to 6.6% y/y (+0.6% m/m) in September, up from 6.3% in August and above market expectations of 6.5% y/y (+0.5% m/m). US core CPI inflation has now reached its highest level since August 1982.

It's another red-hot inflation reading, which means the Federal Reserve will have to tighten its monetary policy even more aggressively to keep inflation expectations in check and set the conditions for a return to the 2% target in the medium term.

Markets reacted wildly to US inflation data:

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  • US 2-year Treasury yields spiked to 4.5%, the highest they have been since August 2007, as of 15:30 London time.
  • US dollar index (DXY) rose to 113.2
  • EUR/USD fell to 0.965
  • USD/JPY soared to 147.4
  • The S&P 500 index (US 500) dipped to 3,530 level
  • Gold slipped to $1,650/oz

Dollar and Treasury yields spike, rate-sensitive assets fall, as inflation rages on

Market reactions following US CPI prints – Photo:, Source: Tradingview

US headline inflation rate and core inflation rate: chart

US inflation rate: headline vs core – Photo:, Source: Tradingview

What is driving the US inflation rate?

The September US CPI rate was primarily driven by increases in the shelter, food, and medical care indexes. The energy index decreased by 2.1% month-to-month as the gasoline index declined, while the natural gas and electricity indices rose.

The index for shelter rose 0.7% month-on-month, as it did in August. The monthly increase in transportation services was 1.9% and the annual increase was 14.6%.

The robust core inflation readings (6.6% year-over-year and 0.6% month-over-month) suggest that price pressures have already spread like wildfire across the entire consumer basket and are not solely driven by energy prices.

Source: BLS

What US interest rates is the market pricing in?

Fed rate hike bets have increased across all maturities as a result of the September US CPI print coming in stronger than anticipated.

Markets are now fully pricing in 75 basis point hikes in November, followed by another 50bps in December, and another 40bps until March 2023, when US interest rates are expected to reach 4.9%.

This market pricing of Fed interest rates is stronger than what the Fed's dot plots revealed in September, which indicated that the policy rate would have peaked at 4.6% in 2023.


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0.64 Price
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148.40 Price
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Long position overnight fee 0.0119%
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Spread 0.050

US dollar index (DXY) analysis: Bolstered by the Fed and real yields

Dollar and real yields have moved in lockstep in 2022 – Photo:, Source: Tradingview

The hot inflation print will prompt the Federal Reserve to raise interest rates further, boosting the dollar.

The US dollar index (DXY) is highly correlated with US real yields, which reflect the Fed's hawkishness and are calculated by subtracting inflation expectations from nominal Treasury yields. 

The higher the real yields, the less incentive there is to invest in riskier assets, and thus the stronger the heaven demand for the dollar. 

US 10-year real yields have risen to 1.7%, the highest level since September 2009, when Lehman Brothers went bankrupt. The US dollar index (DXY) has followed the increase in 10-year real yields in lockstep.

US Treasury yields and inflation: Higher for longer?

US Treasury yields 2-year vs 10-year – Photo:, Source: Tradingview

US Treasury yields have risen to levels not seen in the last 15 years, with 2-year yields approaching 4.5% and 10-year yields reaching the 4% mark, owing to continued increases in inflation rates and higher Federal Reserve interest rates.

The speed at which US Treasury yields have increased over the last year has been impressive, considering that in October 2021, the 10-year Treasury yielded 1.5% and the 2-year yielded 0.5%.

As a result of rising US yields, exchange-traded funds (ETFs) that invest in US Treasuries have significantly sold-off so far in 2022.

The iShares 1-3 Year Treasury Bond ETF (SHY) is down 4.7% year-to-date, while the value of long-term bonds has literally cratered. The iShares 20+ Year Treasury Bond ETF (TLT) has declined 30% so far this year.

There is still downside pressure for US Treasury ETFs if inflation keeps surprising to the upside and the Fed shows a strong willingness to hike rates aggressively.

Treasury ETF: TLT vs SHY – Photo:, Source: Tradingview

Markets in this article

US Dollar Index
105.246 USD
0.141 +0.130%
iShares 20+ Year Treasury Bond ETF
91.49 USD
0.73 +0.810%
1.06502 USD
-0.00183 -0.170%
US 500
4322.0 USD
-4.8 -0.110%
148.402 USD
0.79 +0.540%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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