① If inflation rises again while non farm payrolls are booming, the possibility of the Federal Reserve skipping one of its last two meetings at the end of the year to cut interest rates will further increase So, how will the US September CPI data scheduled to be released at 8:30 pm Beijing time perform?
Before the release of last Friday's non farm payroll data, perhaps no one would have thought that tonight's US CPI data would have much impact on the market. However, now everything has undergone significant changes
Against the backdrop of the Federal Reserve's focus shifting towards employment data, inflation data may no longer determine whether the Fed will cut interest rates by 25 basis points or 50 basis points at a certain meeting. However, on the topic of whether the Fed still needs to cut interest rates, inflation data still holds significant discourse power. Especially against the backdrop of last week's non farm payroll not only showing significantly higher than expected job creation, but also higher than expected wage growth, the Federal Reserve may still be unable to assert whether the "wage inflation" spiral will resurrect!
Many industry insiders have stated that the non farm payroll report, which completely changed market expectations last week, has put greater pressure on this week's US CPI data. If inflation data unexpectedly rises beyond expectations, it is likely to further reduce market expectations for the Fed's rate cut before the end of the year, leading to another wave of market turbulence. This can be seen from the volatility index of options, which is like facing a big enemy
At present, the expectation of the interest rate market has shown that a rate cut is no longer a certainty at the Federal Reserve's meeting at the beginning of next month. If inflation rises again while the non farm payroll is booming, the possibility of the Federal Reserve skipping one of its last two meetings at the end of the year to cut interest rates will further increase - the latest pricing in the interest rate market is actually lower than the September dot matrix forecast of another 50 basis points of cumulative interest rate cuts for the year.
So, how will the US September CPI data scheduled to be released at 8:30 pm Beijing time perform?
Overview of US September CPI Data Expectations
Let's first take a look at Wall Street's expectations for tonight's CPI data:
After the continued decline in CPI in August, institutional economists surveyed by the media currently predict that the overall CPI in September is expected to rise by 2.3% year-on-year (lower than 2.5% in August) and 0.1% month on month (lower than 0.2% in August).
Excluding volatile energy and food prices, the core CPI for September is expected to increase by 3.2% year-on-year (unchanged from the previous value of 3.2%) and 0.2% month on month (lower than August's 0.3%).
The following chart is a summary of Nick Timiraos' estimates for major investment banks from the New Federal Reserve News Agency:
It is not difficult to see from the above estimates that market participants are generally confident that the overall CPI data in the United States will further decline. If the overall CPI increase in September can smoothly drop to 2.3% as expected, it will be the sixth consecutive month of decline, and it will also further approach the Federal Reserve's inflation target of 2%.
Note: CPI data trend over the past 10 years
But at the same time, people may not be happy too early - the main risk point in tonight's market is likely to be concentrated on the core CPI data. The median industry estimate currently shows that the year-on-year increase in core CPI in September is likely to remain at 3.2% for the third consecutive month. While the overall CPI is declining, the core CPI remains stuck above 3%, which may pose significant risks given that the Federal Reserve has already implemented a 50 basis point interest rate cut.
According to media surveys, the expected distribution of core CPI month on month growth in September shows that the number of analysts expecting a 0.2% and 0.3% increase is roughly the same, with only one economist (Prestige's Jason Schenker expects only a 0.1% increase). Therefore, people need to be cautious about the risk of the core month on month CPI slightly exceeding expectations tonight.
In recent months, due to the soaring prices of car insurance, the "super core CPI" (excluding housing and rental costs in service sector data) that the Federal Reserve attaches great importance to has been relatively hot. If this trend continues, it will also be a bad phenomenon.
How can investment banks break down tonight's data specifically?
Currently, Goldman Sachs expects the core CPI in September to rise by 0.28% month on month (higher than the general expectation of 0.2%) and 3.16% year-on-year (consistent with the general expectation of 3.2%). The bank also expects the overall CPI to rise by 0.10% in September, with a year-on-year increase of 2.27% (consistent with general expectations).
Goldman Sachs' forecast for core CPI in September is consistent with its forecast for August. Similar to August, Goldman Sachs expects that the downward pressure on prices from the second-hand car and airline ticket sectors will decrease in September. Due to the rebound in second-hand car auction prices in recent months, second-hand car prices are expected to rise by 1.0% month on month, and airfare prices are expected to rise by 0.5%, reflecting a moderate push from seasonal factors.
Goldman Sachs also emphasized the trends of two other key components that the bank expects to appear in the September CPI report:
① Car insurance. It is expected that car insurance prices will rise by 0.7% again in September, reflecting the continued increase in premiums, although the rate of increase has slowed down. Higher car prices, maintenance costs, medical and litigation costs have put pressure on insurance companies to raise prices, but there is a long delay in transferring premiums to consumers, partly because insurance companies must negotiate price increases with state regulatory agencies.
Now, most of the gap between premiums and costs has narrowed. Therefore, Goldman Sachs expects the growth rate of car insurance prices next year to return to pre pandemic levels.
② Housing prices. After experiencing significant growth in July and August, Goldman Sachs expects housing inflation to ease, with homeowner equivalent rent (OER) increasing by 0.35% and single family housing rent increasing by 0.31%. Looking ahead, the strong growth in rental prices for single family homes may lead to an increase exceeding OER.
Morgan Stanley's forecast is also similar to Goldman Sachs. Da Mo believes that the decline in overall inflation rate is mainly attributed to the decrease in gasoline prices. Driven by second-hand cars, commodity inflation is expected to show positive growth, while airfare prices will also maintain positive growth.
In addition, Da Mo expects the service industry inflation to slow down, mainly due to the decline in housing inflation rate. The company believes that the recent increase in OER (rent) may be affected by temporary seasonal factors and expects a partial correction in this indicator.
Citigroup economists Veronica Clark and Andrew Hollenhorst wrote in a report on Tuesday, "Continued wage strength will pose a clear upward risk to inflation, especially in service sectors such as healthcare
How will tonight's CPI affect the Federal Reserve and financial markets?
According to the Chicago Mercantile Exchange's Federal Reserve Watch tool, market traders currently expect an 85% probability of the Fed cutting interest rates by 25 basis points at its November meeting, with only a 15% probability of remaining inactive.
However, despite the absolute mainstream expectation of a 25 basis point rate cut, UBS economist Brian Rose warned in a report last Friday that "if prices rise faster than expected, coupled with previously strong labor data, the likelihood of the Federal Reserve remaining inactive at the November meeting will increase
Bank of America analysts also stated, "Following last Friday's surge in employment reports, we believe the importance of CPI has increased this week. A significant surprise could bring uncertainty to the easing cycle and bring more volatility to the market
Matthew Weller from Forex.com and City Index stated that the Federal Reserve has decided to shift its focus from inflation to the labor market, which means that inflation data, including CPI, may not have as much impact on the market as before. Although this view has been logical in the past, this month's CPI report may still trigger market volatility driven by last Friday's excellent employment report, which could suggest that inflation is facing upward risks again.
Judging from the recent performance of the financial market, due to significantly reduced expectations of interest rate cuts, the 10-year US Treasury yield and the US dollar index have both reached their highest levels in about eight weeks. Although the US stock market has not suffered much impact, once the inflation situation recurs, it may also bring more uncertainty to the future performance of the US stock market.
The Goldman Sachs team has made the following prediction regarding the impact of tonight's CPI performance on the S&P 500 index:
Simply put, the lower the CPI data, the greater the market's upward potential, and the worst-case scenario is that the core CPI rises above 0.34% month on month.
Goldman Sachs strategist Dominic Wilson concluded that the strong performance of last week's non farm payroll report largely changed the background of CPI. A few weeks ago, I believed that the market would be quite tolerant of slightly higher inflation data and would be excited about the prospect of accelerating easing below expectations. But now, the risk is that higher inflation data will exacerbate the recent narrative shift - that the Federal Reserve may take easing actions far below previous expectations.
Wilson believes that people's reactions to higher than expected inflation tonight may be greater than their reactions to lower inflation, so this data may pose a relatively greater downside risk to the stock market.
A survey conducted by 22V Research before tonight's CPI release showed that 42% of investors expect the market's response to CPI tonight to be "mixed/negligible", 32% of investors believe it will trigger risk aversion, and only 25% of investors trigger risk appetite.
22V founder Dennis DeBusschere stated, "Overall, people are optimistic about inflation." He also pointed out that the proportion of investors expecting an economic recession has decreased, while the proportion of investors believing that financial conditions need to tighten has reached its highest level since June.
Ed Klissold of Ned Davis Research believes that in order to sustain the bull market in the stock market, inflation needs to continue to decline, the economy needs to achieve a soft landing, and the profit growth of American companies needs to remain strong and expand.
