Market analysts believe that traders in the stock and bond markets, who have been anxiously awaiting key inflation data due to the ongoing federal government shutdown, may see their expectations for significant inflation data disrupt the strong rebound in US Treasuries and equities that began in October. With the September inflation data set to be released soon, any unexpected increase could overturn the prevailing consensus in the market regarding multiple rate cuts in the coming months. US Treasury securities rallied strongly throughout most of October, pushing the global risk-free rate benchmark—the 10-year US Treasury yield—below 4% for the first time in six months, with a low of 3.9%, representing its lowest level since April. This significant drop indicates a substantial rebound in the prices of 10-year Treasuries. Despite the postponed release of various key official statistics due to the government shutdown—data that typically help traders outline potential economic and monetary policy trajectories—Treasuries have surged sharply due to the strong risk-off sentiment in the market. Now, the US September CPI data, originally scheduled for release on October 15, is due to be published on Friday, just a few days before the Federal Reserve's next meeting. While most investors believe that the inflation data is unlikely to sway the market's expectations for a 25 basis point rate cut on October 29, a stronger-than-expected inflation reading could entirely disrupt the consensus for further rate cuts over the coming months, posing significant downside risks to recent gains in the stock and bond markets. Global capital is focused on the "anchor of global asset pricing," as any increase in the September CPI above expectations could lead to a substantial rise in the yield curve (with yields and prices moving in inverse relation), potentially resulting in a severe setback for the global stock and bond markets. Conversely, if the US CPI shows a much more optimistic sign of cooling inflation than the market expects, the 10-year US Treasury yield may enter a new downward trajectory, potentially igniting a new bull market characterized by record highs in equities, particularly those closely related to artificial intelligence. Leading tech giants like NVIDIA, Meta, Google, Oracle, TSMC, and Broadcom, along with AI leaders in the computational power industry, have been at the forefront of a historic surge in stock prices and robust performance this year, contributing to an unprecedented investment wave in AI that has propelled the S&P 500 index and the MSCI global benchmark to significant highs since April. Theoretically, the 10-year US Treasury yield serves as the risk-free rate r in key valuation models for the stock market, such as the Discounted Cash Flow (DCF) model. If no significant changes are observed in other metrics (particularly the cash flow expectations on the numerator's side), such as the financial earnings season, where the numerator faces a vacuum of positive catalysts, the higher the denominator remains, or the longer it operates at historical highs, the more risk assets—including tech stocks, high-yield corporate bonds, and cryptocurrencies—face valuation collapse. The strong gains in October for US Treasuries are at risk due to "CPI risks," as "inflation data exceeding general market expectations could alter the outlook," cautioned Kathy Jones, Chief Fixed Income Strategist at Charles Schwab. "Movements in Treasury yields caused by inflation data could indeed become a critical point for the market." According to the US Treasury benchmark statistics, as of Wednesday, the overall return for US Treasuries so far in October, based on price changes, is approximately 1.3%, expected to achieve its best monthly investment return performance since February. Numerous factors have propelled the rally, but the core logic centers on safe-haven buying influxes and heightened expectations for Fed rate cuts—stemming from potential impacts of the government shutdown on economic growth, renewed trade tensions between the US and China, as well as a series of high-profile credit market bankruptcies and slight narrowing of the federal budget deficit. Despite this, current US inflation remains significantly above the Fed's long-term anchor target of 2%. Although this has not deterred the Fed from cutting rates last month, some officials have stated that stubborn inflation leads them to maintain a cautious approach towards further cuts. Economists widely expect the September consumer price report to show a month-over-month increase of 0.4% in overall CPI, with core CPI—excluding food and energy—potentially rising by 0.3%. Both inflation metrics are forecasted to have annual growth rates of 3.1%. This would mark the highest year-on-year growth level for overall CPI data since May 2024. "Inflation data has been quite sticky," stated Tony Farren, Managing Director of Interest Rate Market Sales and Trading at Mischler Financial Group. He emphasized that stronger-than-expected inflation readings could provoke a negative response, while weaker numbers may not necessarily trigger a strong rally if traders remain skeptical about the data published during the federal government shutdown. "They might say, 'There are many estimated components in this figure,'" Farren added. Another variable is crude oil. Until this week, market expectations for future inflation in the US had generally been on a downward trajectory, partly due to a retreat in crude oil prices affecting retail gasoline prices—which account for about 3% of the consumer price index—potentially pushing these prices to their lowest levels since last December. However, this trend was interrupted on Thursday after the US imposed further stringent sanctions on major Russian oil producers, causing the benchmark Brent crude oil price to surge by 6.3%. Current pricing in the short-term interest rate futures market incorporates a high probability of a subsequent 25 basis point rate cut by the Fed during the December monetary policy meeting, with pricing reflecting at least three more cuts next year. If inflation rebounds significantly, these expectations would become very fragile. Recent comments from Fed policymakers, including Dallas Fed President Lorie Logan, Fed Governor Michael Barr, and St. Louis Fed President Alberto Musalem, indicated that the risk of tariffs pushing up US prices has led to a hesitant attitude regarding further rate cuts amid a significant slowdown in employment growth. "If inflation on Friday exceeds general market expectations, the bond and stock markets might face asymmetric downside risks. However, if traders begin to question the quality of US economic data, the first reaction may not necessarily be the final one," cautioned macro strategist Tatiana Darie from Bloomberg Strategists. "If the US economy fails to continue slowing down and inflation readings remain significantly above the Fed's anchor target, it would be exceptionally challenging to justify the market's expectations for a one percentage point rate cut over the next year," remarked Robert Tipp, Chief Investment Strategist and Global Head of Fixed Income at PGIM. "As this expectation has already been fully priced in, there might be concerns about what level these inflation figures truly reflect and whether they support the rate cut narrative that has already been priced in." Investor anxiety in this regard is fully reflected in trading activities across the US Treasury options market, which includes several noteworthy trades aimed at hedging against the risk of the 10-year US Treasury yield rebounding to 4.05% or even higher than 4.10% by this weekend. The benchmark yield for US Treasuries—the 10-year yield—closed at the 4% mark on Thursday due to a sharp rise in oil prices, rising by 0.05 percentage points within the day, with little movement seen in early trading sessions on Friday. Interest rate strategists from Barclays Capital Markets have advised investors to exit bullish positions in US Treasuries that have been recommended since June, partly due to the potential erosion of overall profit gains from September CPI data. On the other hand, Wall Street giant Morgan Stanley posits that there is clearly "upside surprise risk" for the September US CPI based on seasonal patterns, suggesting investors prepare for a rise in the 10-year breakeven inflation rate—indicating bets on an uptick in CPI readings that equalize nominal US Treasury and Treasury Inflation-Protected Securities (TIPS) yields. "We have slightly elevated concerns about inflation compared to the market's current pricing," stated Anders Persson, Chief Investment Officer and Head of Global PHI at Nuveen Asset Management. "We still believe the Fed will act to cut rates at the next meeting, and the terminal interest rate path will continue to favor a downward trend, but we still desire more signals indicating cooling inflation."