U.S. inflation in October exceeded expectations, and Deutsche Bank further raised its forecast for the Federal Reserve's interest rate hikes, incorporating an increase in January next year into its baseline scenario. The bank expects the central bank to raise rates by 25 basis points consecutively in December, January, and March, pushing the rate up to 4.50%—4.75%.

Written by: Xiao Yanyan, Jin Shi Data

After the U.S. October inflation data surpassed expectations, Deutsche Bank swiftly shifted to a more hawkish policy forecast, predicting that the Federal Reserve will consecutively raise rates in the next three meetings, altering its previous judgment of pausing actions in January next year.

Previously, Deutsche Bank expected the Federal Reserve to raise rates by 25 basis points in December and March next year, with a pause in the January meeting. However, the latest prediction has included a rate hike for January next year in the baseline scenario, expecting the Federal Reserve to raise rates by 25 basis points in December, January, and March each.

This means that the target range for the federal funds rate will rise from the current 3.75%—4.00% to 4.50%—4.75%.

Deutsche Bank effectively transformed the "accelerated tightening" risk scenario proposed by UBS into its own baseline forecast. The focus of the Federal Reserve's policy discussion is shifting from whether to raise rates in December to how quickly it will continue to tighten monetary policy thereafter.

October inflation exceeded expectations, Deutsche Bank raised the rate hike path

This adjustment is directly driven by the U.S. October Consumer Price Index (CPI) report. The data shows that overall prices in the U.S. rose by 0.4% month-on-month, higher than the market expectation of 0.3%. Deutsche Bank believes this report indicates that inflationary pressures remain widespread across various categories.

The bank also assessed the possibility of the Federal Reserve undertaking a larger rate hike.

Before the inflation data was released, Federal Reserve Governor Christopher Waller stated that if price pressures accelerated further, the Federal Reserve should consider raising rates by 50 basis points in December instead of a conventional 25 basis point adjustment.

Deutsche Bank believes Waller's statement opened up a discussion space for a larger rate hike. The bank does not rule out the possibility of a 50 basis point hike by the Federal Reserve in December but emphasizes that this is not its fundamental forecast.

Judgments from other large banks are also noteworthy. UBS believes the internal support within the Federal Reserve's rate-setting committee for a one-time 50 basis point hike is limited, and still considers raising rates by 25 basis points in December and March next year as the baseline scenario, while warning that the risk of further rate hikes or an accelerated tightening pace still exists.

While the predictions of the two banks are not completely identical, they reflect a changing focus in market discussions: investors are no longer just concerned about whether the Federal Reserve will raise rates in December but rather about how quickly tightening will proceed thereafter.

According to the CME's FedWatch tool, traders currently expect that the probability of the Federal Reserve raising rates by 25 basis points at the meeting from December 8 to 9 has exceeded 95%. In contrast, whether to continue raising rates in January next year is becoming a new focal point for policy expectation adjustments.

If the Federal Reserve follows Deutsche Bank's predicted path and raises rates consecutively three times, the tightening intensity will exceed the market's previous expectations for policy after December, likely prompting a repricing of the U.S. Treasury yield curve's short end and the dollar.

Gold is also under pressure. After the U.S. October CPI was released, the yield on ten-year U.S. Treasuries has climbed back to near 5%, while gold prices have dropped back below $4,000 per ounce. If the market further digests the expectations of consecutive rate hikes, rising real interest rates and a stronger dollar may continue to limit gold's performance.

The stock market is also unlikely to remain detached. AI-related stocks have recently been impacted by factors such as turmoil in Nvidia's leadership. If financing costs rise further, high-valued tech stocks may face greater valuation pressure.

Oil prices are another important variable. If energy prices rise again and drive overall inflation higher, the justification for continued rate hikes by the Federal Reserve will be further strengthened; conversely, if crude oil prices continue to fall and inflationary pressures ease, rate hike expectations may also cool down.

Looking ahead, the market will focus on U.S. November labor market data and the policy signals released by officials before the December Federal Reserve meeting. For investors, what truly needs to be reassessed is not just whether the December rate hike will materialize, but whether the Federal Reserve will continue to maintain the pace of consecutive tightening at the beginning of next year.