Why stocks are falling and 10-year yields are climbing back near 5% after Tuesday's inflation report

By Joy Wiltermuth

'I don't think they should be raising another 25 basis points,' says a portfolio manager about the Federal Reserve's benchmark interest rate

Stocks were falling and Treasury yields were rising to near 5% Tuesday after October's hot inflation report.

It's another day of whiplash on Wall Street.

Bond yields surged and stocks slumped early Tuesday after the consumer inflation report for October suggested the Federal Reserve might need to open up the throttle on its inflation fight.

The consumer-price index report showed that prices across broad categories of goods and services moved higher, gaining 0.4% in October and topping the 0.3% forecast.

After the report was released, the yield on the policy-sensitive 2-year Treasury note BX:TMUBMUSD02Y shot up 18 basis points to 4.74%, as the chart below shows, putting it on track for the biggest one-day rise in two years, according to FactSet data. That's well above the 4% level that marks the top of the Fed's short-term policy range, indicating that more rate hikes could be coming.

"We are so heavily dependent on oil around the world to make and do things, it drives everything up," said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, after the inflation report.

Yet talk of a half-point rate hike would be "irresponsible," because higher rates won't resolve the oil shock from the Iran war, Pavlik said. Instead, a jumbo hike would hurt consumers already facing higher borrowing and fuel costs.

"I don't think they should be raising another 25 basis points," he added.

Along with the 2-year rate, the benchmark 10-year Treasury yield BX:TMUBMUSD10Y pushed 12 basis points higher to 4.99%. That put the rate used to price new mortgages, corporate debt and other types of borrowing back at the cusp of the all-important 5% level.

Stocks opened lower Tuesday following the inflation report, with a broad rotation into everyday stocks hitting pause. A day before, the Dow Jones Industrial Average DJIA logged another swing of more than 1,000 points as stocks continued to gyrate in the wake of the midterm elections.

"We would be patient and disciplined about buying equities on pullbacks," Gary Schlossberg, global strategist at Wells Fargo Investment Institute, said in emailed comments. "We anticipate a choppier equity market going forward and would focus on higher quality equities," such as U.S. large-cap stocks in the industrials, materials and communication services sectors, he added.

Related: Dow sees its third 1,000-point swing in four days. Why the volatility isn't over yet.

Earlier in London, Fed governor Christopher Waller said he would recommend a half-point hike if core inflation hit 0.3% or more - which it did - because that would suggest inflation keeps moving further away from the Fed's 2% yearly inflation target.

The chances of a quarter-point hike in December were above 85% on Tuesday, while the probably of a jumbo half-point hike was near 15%, up from zero a day ago, according to the CME FedWatch Tool.

The S&P 500 SPX was 0.2% lower Tuesday, the Dow Jones Industrial Average was off 0.3% and the Nasdaq Composite Index COMP was down less than 0.1%, according to FactSet.

-Joy Wiltermuth

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11-10-26 1047ET