US financial markets experienced significant volatility during Wednesday and Thursday trading sessions following the release of September inflation data, which showed consumer prices rising more than expected, bringing the possibility of further monetary tightening by the Federal Reserve back into focus. The Consumer Price Index increased by 0.6% on a monthly basis, compared with 0.4% in August, marking its largest monthly increase since April. Annual inflation accelerated to 3.7%, up from 3.4% in the previous month and exceeding market expectations of 3.6%.
Core inflation also increased by 0.3% on a monthly basis, compared with expectations of 0.2%, while the annual core inflation rate reached 2.6%, up from 2.4% in August. The increase was primarily driven by higher energy prices, with gasoline prices jumping 9.1% in September and accounting for more than half of the monthly rise in headline inflation. Meanwhile, energy prices recorded an annual increase of 20.4%, raising concerns that inflationary pressures could persist in the coming months.
The inflation figures had an immediate impact on the US Treasury market, with the benchmark 10 year Treasury yield rising by 8.2 basis points during Wednesday trading, climbing from 5.184% to 5.266% and approaching its highest levels in nearly 24 years. The increase reflected growing expectations that interest rates could remain elevated for longer. Meanwhile, the 2 year Treasury yield remained relatively stable near 4.774%, while the 30 year Treasury yield edged lower to 5.538%.
However, Treasury yields reversed direction during early Thursday trading as demand for government bonds increased following a sharp selloff in technology and artificial intelligence stocks. The 10 year Treasury yield declined by 1.6% to 5.104%, after reaching 5.333% on Wednesday evening. Yields on 20 year and 30 year Treasury bonds also fell to 5.503% and 5.455%, respectively, while the 5 year Treasury yield declined to 4.908%. Investors increasingly shifted toward lower risk assets to protect their portfolios from volatility in equity markets.
Technology stocks came under pressure as investors grew concerned about the impact of rising financing costs on companies that rely heavily on borrowing to fund their investments, particularly those operating in the artificial intelligence sector. Questions also emerged regarding the ability of these companies to maintain their expected growth rates in an environment of elevated interest rates. The Nasdaq Composite Index declined by approximately 1.9% during Wednesday trading, while South Korea’s KOSPI Index plunged 8% on Thursday, triggering a temporary trading halt. These declines encouraged investors to increase their exposure to US Treasury bonds and gold, which are traditionally viewed as safe haven assets during periods of market instability. This shift in investment flows explains the decline in Treasury yields despite persistent concerns surrounding inflation and monetary policy.
In currency markets, the US Dollar Index climbed to 102.54, reaching its highest level since April 2025 as expectations of additional interest rate increases strengthened following the inflation report. Market pricing showed that the probability of a 25 basis point rate hike in October rose to approximately 37%, compared with 22% before the data release. Nevertheless, keeping interest rates unchanged remained the more likely outcome, while other estimates indicated a 70.6% probability of a rate increase in December.
These expectations remain subject to change as new economic data becomes available, particularly the Producer Price Index, which includes certain components used in calculating the Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred inflation measure. Any additional increase in inflationary pressures could prompt the central bank to reconsider the timing of its interest rate decisions, especially if energy prices remain elevated for an extended period.
Against this backdrop, UBS reiterated its recommendation to buy the US dollar during price declines, citing persistently high energy prices and strong investment activity associated with artificial intelligence as key supporting factors. The bank also expects the euro to remain under pressure amid ongoing economic challenges in Europe. UBS highlighted that the yield spread between French and German 10 year government bonds has stabilized near 140 basis points, reinforcing its preference for selling the EUR/USD currency pair during rallies. The bank expects the pair to test 1.1050 during the fourth quarter while maintaining its target of 1.1200 for the end of 2026.
Despite early signs that diesel prices may be approaching stabilization, exceptionally low European natural gas inventories and rising gas futures prices continue to weigh on the euro. UBS believes that the recent weakness in technology stocks could temporarily limit gains in the US dollar, while weaker than expected US inflation figures could reduce expectations of additional interest rate increases. Regarding commodity currencies, the bank expects the Australian, New Zealand and Canadian dollars to recover part of their September losses, with the Canadian dollar remaining its preferred currency for tactical buying positions.
Energy prices remain among the most important factors influencing Federal Reserve policy decisions in the coming period, particularly as disruptions to global energy supplies continue amid the war with Iran. Some economists believe that persistently elevated energy prices could lead the central bank to view inflation as a longer lasting problem rather than a temporary increase in prices. Such a development could justify maintaining a restrictive monetary policy or introducing additional measures to contain inflation.
Meanwhile, a Federal Reserve report revealed uneven economic activity across the United States, with two of the twelve Federal Reserve districts reporting moderate growth, three recording modest growth, four experiencing slight growth and three reporting no significant change. These findings suggest that the central bank faces an increasingly difficult challenge in balancing inflation control with economic growth. Consequently, inflation figures, labor market developments and statements from Federal Reserve officials are likely to remain key drivers of the US dollar and Treasury yields in the coming period.
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