Investors and traders are preparing for tonight's CPI inflation data, with all eyes on how the data may affect market dynamics. This CPI may consolidate or overturn current forecasts for the pace of monetary easing by the Federal Reserve, and is a major test for the economy and financial markets.
Economists predict that the overall CPI inflation in the United States will rise slightly by 0.1% month-on-month in September, which is the smallest increase in three months; the year-on-year growth rate of the overall CPI is expected to drop from 2.5% in August to 2.3%, continuing the six-month downward trend of price pressures. If the data released at 8:30 tonight performs in line with expectations, it will hit the lowest value since February 2021. However, the core CPI, which excludes food and energy prices, is more concerned and is expected to rise by 0.2% month-on-month, and the year-on-year growth is expected to remain stable at 3.2%.
If CPI inflation falls more than expected, it could strengthen the argument of Fed doves for more aggressive rate cuts, and possibly another 50 basis point cut in November. Conversely, a higher-than-expected core CPI reading could make some of the more hawkish members of the Fed's FOMC more hesitant about cutting rates next month. An unexpected rise in inflation could force investors to further downgrade their expectations for rate cuts this year, making it less likely that the Fed will cut rates quickly and sharply.
Given the current macroeconomic environment, with inflation in the spotlight and uncertainty surrounding the Fed's next move, investors need to take a cautious and strategic approach to their portfolios. Volatility across assets could increase, depending on tonight's CPI results.
If inflation is higher than expected, the possibility of a more hawkish Fed stance will lead to market turmoil, especially for growth stocks that are sensitive to rising interest rates. In this case, defensive sectors such as utilities, healthcare and consumer staples may provide a safer "haven". However, if CPI data indicates a cooling of inflation, technology stocks, especially those involved in artificial intelligence and semiconductors, are expected to receive continued attention from investors.
Bank of America Global Research also said that given the improvement in macroeconomic data, the market should be able to withstand a small upward trend in inflation, but if the CPI shows a "big surprise", it may bring uncertainty to the Fed's rate cut cycle and bring greater volatility to the market. "Following the release of the blowout non-farm payrolls report last Friday, we believe that the importance of CPI this week has increased," wrote the team led by Ohsung Kwon, the bank's global equity and quantitative strategist.
Meanwhile, a recent rise in Wall Street’s “fear index” (VIX) also means that with the S&P 500 at an all-time high and credit spreads at two-year lows, stock market volatility around CPI “could be larger than before.”
In conclusion, Thursday's CPI inflation report is a key event that could either pave the way for further easing by the Fed or disrupt the current market narrative. Lower-than-expected inflation data could support more aggressive rate cuts, while higher numbers could dampen expectations and keep the market on guard against a more cautious monetary policy by the Fed. The market is likely to remain sensitive to economic data, so keeping a close eye on the changing inflation situation is critical to successfully allocating a portfolio and making profits on trading.
Article forwarded from: Jinshi Data
