Before the release of the non-farm payrolls last week, no one would have expected that tonight's inflation data would be so important, because it will provide clues for the Fed's last two interest rate decisions this year and verify whether last month's aggressive rate cuts were a big mistake.
The market was optimistic that inflation had been defeated when the Fed launched its easing cycle last month and expected at least two rate cuts by the end of the year. Therefore, people were generally more tolerant of slightly higher CPI data and excited about lower-than-expected CPI.
But the US non-farm payrolls report released last Friday destroyed this optimistic expectation. The number of new jobs was far higher than expected, the unemployment rate unexpectedly dropped to 4.1%, and the year-on-year wage growth rate increased. People began to worry about the overheating of the economy, and former US Treasury Secretary Summers even shouted that the Federal Reserve's "50 basis point rate cut in September was a mistake."
Now, CPI data needs to be weaker than before to ease market concerns; higher-than-expected inflation could reverse the current "Goldilocks" narrative and have a greater negative impact on the market.
The market expects CPI to continue to cool in September
Tonight, the market's attention is focused on this heavy inflation data. Once inflation rises, the market is worried that the Federal Reserve may stop cutting interest rates in November.
Currently, the market's expectations for the September CPI data are:
CPI rose 0.1% month-on-month, down from 0.2% last month;
The core CPI fell to 0.2% month-on-month, also lower than the previous 0.3%;
On an annual basis, CPI fell from 2.5% to 2.3% year-on-year, the lowest increase since the beginning of 2021;
Core CPI is expected to remain unchanged for the third consecutive month, rising 3.2% year-on-year.
Goldman Sachs' forecast shows that airfares will fall by an average of 3.4% and used car prices will fall by an average of 1.1%. Thanks to these two factors, inflation pressure will ease in September.
Housing inflation is also expected to ease, with owner equivalent rent forecast to rise 0.35% and prime rent to rise 0.31% after sharp increases in July and August.
It is important to note that the core CPI has been stubborn in recent months due to a surge in auto insurance prices. If this trend continues, the stickiness of the core CPI may further increase. Goldman Sachs expects auto insurance prices to rise again by 0.7% in September.
Powell spoke earlier this week about his growing confidence that inflation will return to the 2% target and said the 50 basis point rate cut in September reflected that confidence. He said more employment and inflation reports will be considered before the Fed's November meeting.
The November rate cut is still controversial, and inflation risks will shake the market's optimistic expectations
Minutes released overnight showed that Fed policymakers remain divided over their aggressive September rate decision, further lowering expectations for rate cuts. Anna Wong, chief U.S. economist at Bloomberg Economics, expects a 25 basis point cut in November, following the Federal Open Market Committee's half-point cut last month.
Lou Miller, an analyst at Goldman Sachs, said:
“The 10-year yield has risen 45 basis points from its lows, and if inflation shows signs of being more stubborn, it could gradually change the current ‘Goldilocks’ optimistic scenario of the Fed cutting interest rates amid strong U.S. economic growth and improving corporate earnings trends.”
Dominic Wilson, a strategist at Goldman Sachs, said:
"The market may react more sharply to rising inflation than cooling inflation, and the stock market may therefore see a downward trend."
He added that while the data could trigger a market downturn, the overall impact may not be as large as previously thought. There are two specific reasons:
As the market has readjusted its expectations for future interest rates, especially the interest rate expectations for mid-2025 have risen by nearly 50 basis points, this means that the market has absorbed some of the expectations for future rate hikes, which may reduce the impact of future data on the market.
There are many concerns about future data in the market, which may make the actual market consensus more conservative than it appears. If the actual data performs better than expected, people will feel more relieved.
