Several major developments have just emerged in quick succession. On one side, U.S. inflation data came in well above expectations across the board, sharply raising expectations of a Federal Reserve rate hike. On the other, China’s September data on prices, money supply and foreign trade were released at the same time, making the divergence between domestic and external demand increasingly clear. Global markets underwent a sharp repricing within just a few hours.
1. U.S. September CPI: Inflation heats up across the board, rate-hike bets double
Data just released by the U.S. Department of Labor showed that the Consumer Price Index (CPI) rose 3.7% year over year in September, above the market expectation of 3.6% and sharply up from 3.4% previously. More importantly, core CPI rose 2.6% year over year, also exceeding the expected 2.5% and reaching its highest level since June this year; it rose 0.3% month over month, above the expected 0.2%. Energy prices were the main driver of this month’s higher-than-expected inflation. U.S. energy inflation surged 20.4% year over year in September, well above 16.3% the previous month, as persistent tensions in the Middle East pushed diesel prices to a record high. Meanwhile, service prices also rose markedly faster in September. Since services inflation is typically more persistent, this has prompted fresh doubts in the market about the path of inflation’s decline.
Markets reacted sharply after the data was released. The CME FedWatch Tool showed that traders’ bets on a 25-basis-point Fed rate hike in October surged from about 22% before the release to 43.7%, nearly doubling, while the probability of rates remaining unchanged fell to 56.3%. Markets also expect the Fed to deliver a cumulative three more rate hikes by the end of 2027.
Asset prices adjusted sharply across the board: the 10-year U.S. Treasury yield rose to 5.318%, while the 30-year yield also climbed; spot gold fell about $30 in a short period to around $4,118 per ounce, down 1.4%; silver dropped more than 3%. Ahead of the U.S. stock market open, chip stocks came under notable pressure—SK Hynix and SanDisk fell more than 3%, AMD and Intel dropped over 2%, and Nvidia, Micron Technology, and ASML lost about 1%.
This report is particularly important because it is the last CPI release before the Fed’s October 27–28 policy meeting. The rate decision will be announced at 2 a.m. Beijing time on October 29, while the September PCE data—the inflation measure the Fed focuses on more closely—will not be released until the evening of October 30, Beijing time. In other words, tonight’s CPI report is the most important inflation signal policymakers will have before the meeting.
Federal Reserve communications indicate that the September meeting minutes showed most officials expected another rate hike might still be needed before the end of the year, but they did not lay the groundwork for consecutive hikes in October. Tonight’s stronger-than-expected core CPI reading may not be enough on its own to change expectations that rates will be left unchanged in October, but it reinforces a more important expectation: the September hike was almost certainly not a “one-and-done” move, and the likelihood of a “higher for longer” policy rate is rising.
2. China’s September prices: upstream prices rebound, while consumer prices remain weak
On the same day, China’s National Bureau of Statistics released its September CPI and PPI data.
September CPI rose 0.9% year over year, 0.1 percentage points faster than the previous month. Core CPI, which excludes food and energy prices, rose 1.0% year over year, unchanged from the previous month. PPI rose 5.0% year over year in September, 1.2 percentage points faster than the previous month and its highest level in four years. It rose 1.2% month over month, an increase 0.8 percentage points greater than the previous month.
These figures reveal a clear structural divergence: prices of upstream industrial goods have rebounded sharply, while consumer prices at the retail level remain weak. By CPI component, gasoline prices rose 16.6% year over year, making the largest contribution to the rebound in headline CPI; service prices rose 0.8%, unchanged from the previous month; and food prices fell 1.7%, with pork and fresh vegetables down 10.0% and 8.1%, respectively, continuing to weigh on CPI. The strong rebound in PPI largely reflects the pass-through of international commodity prices and rising costs in some manufacturing sectors, rather than a broad-based recovery in final demand. The year-over-year CPI-PPI gap has widened, underscoring the persistent weakness in the recovery of domestic demand.
3. M1 growth drops sharply: money is “sitting idle” instead of circulating
The September financial data released by the central bank on the same day offered an even more noteworthy signal.
At the end of September, M2 stood at 359.63 trillion yuan, up 7.2% year over year, compared with 7.5% previously. M1 stood at 116.76 trillion yuan, up 3.2%, compared with 4.1% previously. M1 growth fell 0.9 percentage points in a single month, a sizable decline.
M1 consists of corporate demand deposits and cash in circulation, so changes in its growth rate directly reflect businesses’ willingness to invest and how actively funds are being used. The sharp slowdown in M1 growth indicates that businesses have less demand-deposit funding on their books—in other words, more funds are sitting in time deposits rather than being used for day-to-day operations. The gap between M2 and M1 has widened to about 4 percentage points, indicating that overall money supply is not tight, but that more money is “sitting idle in time deposits.” Money is circulating less actively, and turnover in the real economy remains weak.
This also offers a monetary explanation for the stock market’s weakness in September: overall liquidity is ample, but there is little momentum to turn it into active business funding or allocations to risk assets. By loan category, household lending remained weak in September. New medium- and long-term household loans were 162.6 billion yuan lower year over year, while short-term household loans were 232.1 billion yuan lower. New medium- and long-term corporate loans were also 20 billion yuan lower year over year. Everbright Securities noted that it will take time for easier credit conditions to feed through to the real economy.
4. Foreign trade remains strong: the trade surplus reaches a recent high, but the divergence persists
Foreign trade remained strong in September. In U.S. dollar terms, exports totaled $447.18 billion, up 36.3% year over year and well above market expectations of 25.5%. Imports totaled $313.66 billion, up 31.0%, also exceeding expectations. The trade surplus widened to $133.53 billion in September, its highest level since January 2025.
The main drivers of exports were equipment manufacturing sectors such as AI computing hardware and new energy equipment. The ongoing global boom in AI infrastructure investment is providing strong support for demand for China’s high-tech products. On the import side, capital spending across China’s AI supply chain has boosted purchases of chips and equipment, while rising international commodity prices have also contributed to faster import growth.
The large trade surplus is an important pillar supporting the renminbi and once again demonstrates the competitiveness of Chinese manufacturing in global supply chains. However, it is important to recognize that the divide between strong external demand and weak domestic demand has not changed as a result of these trade figures. Strong export growth is concentrated largely in specific parts of industrial supply chains, in sharp contrast with subdued domestic consumer demand.
5. Looking ahead: the window for policy support is narrowing
Taking all of tonight’s information together, the broad macroeconomic picture is as follows: externally, a resurgence in U.S. inflation has rekindled rate-hike expectations, increasing the likelihood of a “higher for longer” global interest rate environment; domestically, upstream industrial prices are rebounding, but the recovery in final demand remains inadequate, money is circulating less actively, and business investment needs a boost.
With this combination of factors, the need for further macroeconomic policy support is growing. Expectations for additional monetary easing are building, and several institutions believe a reserve requirement ratio cut this year is significantly more likely than an interest rate cut. A rate cut would need to take into account the repricing of existing loans early next year, whereas an RRR cut would more directly release long-term funding and lower banks’ funding costs. The possibility of an RRR cut in the coming month warrants close attention.
Important notice: This article shares views and information and does not constitute investment advice. Markets involve risk; investment decisions should be made independently.