Morning Bid: New stock records as storm passes and CPI due

A look at the day ahead in U.S. and global markets from Mike Dolan

With U.S. stocks at new records and devastating Hurricane Milton now weakening as it passes over Florida, the shifting U.S. interest rate horizon is back in focus with September's key inflation update due on Thursday.

Despite the stormy weather and Middle East anxiety, U.S. economic soundings remain robust and Federal Reserve easing expectations continue to be dialled back - sending the dollar to near two month highs in the process.

With the U.S. economy estimated to be still expanding at more than 3%, markets now seeing little more than an 80% chance of another Fed rate cut next month and the whole rate futures curve has backed up some 50 basis points over the past month.

That puts a notional Fed 'terminal rate' closer to 3.5% - well above the 2.9% long-term 'neutral' rate Fed policymakers indicated at their last meeting.

Minutes of that meeting late Wednesday showed a "substantial majority" of officials supported a half-point rate cut to start the easing cycle, but there appeared to be agreement the first move would not commit the Fed to any particular pace thereafter.

A stream of Fed speakers this week seem to back that up.

"Two more cuts this year, or one more cut this year, really spans the range of what is likely in my mind," San Francisco Fed boss Mary Daly said overnight.

After a lacklustre 10-year Treasury note auction on Wednesday, 10-year yields climbed to their highest since July and both two and 10-year yields have now got a foothold back above 4%.

Perhaps more concerning for the Fed is creeping market inflation expectations, with so-called 'breakeven' expectations from the 10-year inflation-protected securities markets rising to near three-month highs at 2.3% - nearly 30 basis points higher than they were a month ago.

And more worryingly ahead of next month's election, the U.S. Treasury 10-year term premium, a measure of the compensation investors demand to hold long-term government debt securities, moved back into positive territory this week.

That spins attention into today's critical consumer price report, where headline annual CPI inflation is expected to ease to 2.3% - its lowest in more than three years - but with 'core' inflation stickier around 3.2%.

"I continue to see a meaningful risk that inflation could get stuck above our 2% goal," Dallas Fed chief Lorie Logan said on Wednesday, adding that the Fed "should not rush to reduce the fed funds target to a 'normal' or 'neutral' level".