〔Day Digest〕Waller Reaffirms More Hikes with 'Flexibility' on Pace as 10Y Sticks at 5.276% and Dollar Drifts Off 18-Month High - AI Capex Now Cited as Fresh Inflation Driver

0. Daily Arc

Waller reopened the Asian session by reiterating that more hikes are needed but with 'flexibility' on the pace, and that the dot plot may show an early-2027 hike followed by cuts ^[1][2][3]. The long end did not cooperate: the 10-year Treasury yield held at 5.276% and the 30-year at 5.660%, both near multi-decade highs ^[4][5][6]. The dollar drifted off an 18-month peak after the FOMC minutes ^[7][8], and the S&P 500 forward P/E compressed to 19.3x from 22.2x year-to-date as the Russell 2000 sat 9% below its peak ^[9]. Net: a hawkish Fed at the front end against a long-end supply premium and equity-multiple compression, with AI capex now flagged as the new inflation variable ^[10][11][12].

1. Fed Messaging

• **[ONGOING] Fed Governor Waller:** 'more hikes needed' with 'flexibility' on pace; the dot plot may reflect an early-2027 hike followed by cuts ^[1][2][3]. In his Istanbul Economic Forum speech on the signaling value of the Summary of Economic Projections, Waller argued the Fed can 'signal' policy options without committing to forward guidance ^[13][14].
• **[NEW] FOMC minutes (Sept meeting):** most participants felt raising the target range further by year-end 'may be appropriate' ^[10][11][15]. Several officials observed core goods inflation remains elevated and that 'AI construction impact appears to be strengthening' while tariff effects fade ^[11]. Fed staff raised inflation projections for 2026-2028, now seeing a return to 2% by 2029 — a year later than the July projection ^[11]. Minutes also flag a split between officials who frame further hikes as 'containing an energy shock' versus those focused on 'preventing demand-driven inflation' ^[16].
• **[NEW] ING (Chris Turner):** markets have priced a 25bp December hike plus 2027 tightening, but ING views that as too aggressive and sees limited near-term correction; a strong 10-year auction (high bid-to-cover and indirect demand) underpins the dollar ^[17].
• **[NEW] Infrastructure Capital Advisors (CEO and portfolio manager, unnamed):** likes 10-year USTs, expects only one more hike in line with the dot plot, sees 10-year stabilizing around 5% as weak housing data and soft core CPI prompt a pause ^[18].
• **[ESCALATED] Political pressure:** Trump said the Federal Reserve Board would like to see the country do badly ^[19]. One Chinese broker note argues the October FOMC may pause on Trump pre-midterm liquidity demands, then enter a 'rapid hiking phase' post-midterm — single-source, unverified ^[12].
• **[NEW] Reuters analyst survey:** 2-year expected to fall to 4.70% in three months, 4.60% in six, 4.25% in a year (vs. 4.20%/4.12%/4.00% in September); 10-year expected at 5.00% in three months, 4.90% in six, 4.75% in a year (vs. 4.67%/4.65%/4.55%) ^[16].

2. Rates and Curve

• **[ESCALATED] Long-end anchor:** 10-year Treasury at 5.276%, 30-year at 5.660%, both near multi-decade highs hit on Wednesday; WSJ: borrowing costs hovering 'just shy' of those highs ^[4][5][6]. The 10-year intraday earlier touched 5.36% ^[5].
• **[ONGOING] Supply premium:** ING cites a strong 10-year auction (high bid-to-cover and indirect demand) showing demand at 5%+ yields, but the supply imbalance keeps UST supply pressure heavy ^[17]. TLT is down nearly 9% YTD ^[4].
• **[NEW] Mixed macro tape:** September non-farm payrolls only +29,000 with unemployment at 4.2% (a 7-month high) cooled October hike odds, but the September ISM Manufacturing Prices Paid index jumped from 71.1 to 77.9 — near the level seen just after the Middle East conflict broke out ^[10]. The 1-year NY Fed inflation expectation rose to 3.9%, the highest since May 2023 ^[16].

3. Dollar, Equities, Cross-Assets

• **[NEW] Dollar:** edged back from an 18-month high after the FOMC minutes ^[7][8]. ING expects the dollar to stay firm over coming months on French/European risk and high UST yields ^[17].
• **[NEW] Equities:** S&P 500 forward P/E compressed to 19.3x from 22.2x YTD; Russell 2000 down 9% from its late-summer high, one step from a technical correction ^[9]. Bob Doll (CIO, Crossmark Global Investments) said earnings strength has masked the rate hit; Mark Hackett (Chief Market Strategist, Nationwide Investment Management) called it 'Finance 101 — higher rates, lower stock values' ^[9].
• **[NEW] Close:** Dow -341.41 (-0.66%) at 51,179.87; Nasdaq -0.22% at 27,538.69; S&P 500 -0.22% at 7,801.77 ^[5].
• **[NEW] Europe stress:** France considering more short-term debt issuance; UK 10-year briefly hit a six-day high of 5.44%; euro under pressure from the French fiscal backdrop ^[16].
• **[NEW] Iran:** Iranian official said US recognition of Iran's uranium enrichment right is a 'red line,' keeping the energy/inflation channel live ^[5].

4. Contrarian Trade and What Falsifies It

• **[NEW] TLT and XLU call-option volume is surging,** with Interactive Brokers' Steve Sosnick saying the activity 'very directly' reflects bets on a long-end rate reversal ^[4].
• **Falsification test:** a 10-year sustained move above 5.30% alongside further equity P/E compression would invalidate the contrarian bet ^[4][9]; conversely, a clear dovish signal at the October FOMC or a softer October CPI would validate the long-end rally thesis ^[4][10][12].
• **Source quality control:** the Infrastructure Capital view and the 'post-midterm rapid hiking' thesis are single-source and unverified ^[18][12]; the French fiscal stress line aggregates multiple single-source feeds and should be treated as a sentiment cluster, not a confirmed policy shift ^[16]. The Reuters survey is the cleanest read on market expectations, but the September-to-October downgrade in 10-year forecasts (5.00% vs. 4.67% in three months) implies the analyst community is more cautious than the contrarian options trade ^[4][16].