For the US CPI in September, Bank of America predicts that the overall and core CPI will be recorded at 0.1% and 0.3% respectively on a month-on-month basis. On a year-on-year basis, Bank of America expects the overall CPI to fall by 0.2 percentage points to 2.3%, while the core CPI will remain at 3.2%. Bank of America's expectations for the core CPI month-on-month are higher than the market consensus.

Similar to last month, Bank of America expects core inflation to be pressured by upward pressure from airfares and out-of-town accommodation costs. In addition to these volatile items, rent will remain the main sticky source of inflation. Another item to watch closely is used car prices. Wholesale auto auction prices have risen in recent months, which should be reflected in used car prices in September.

In addition, based on Bank of America's forecast for September CPI and its assumptions for the PCE sub-item, core PCE inflation is currently expected to increase by 0.18% month-on-month in September. Although this will be a good data, Bank of America expects that this data will neither be weak enough to trigger a strong market reaction nor strong enough to change the general consensus of a 25 basis point rate cut in November.

The performance of CPI sub-items will be an important factor in assessing the impact on the Fed's policy. If the core PCE reaches or exceeds 0.3% month-on-month, it will indicate a more obvious acceleration trend relative to previous months. Bank of America believes that the core PCE must reach at least 0.3% month-on-month for the market to regard the possibility of unchanged policy and rate cut in November as 50-50.

How to judge whether the Fed will keep interest rates unchanged in November, or cut them by 25 basis points or 50 basis points? Bank of America pointed out that the market is now pricing in a 21 basis point rate cut in November, indicating that the market believes that the probability of the Fed keeping interest rates unchanged is 16%. The last time the Fed stopped cutting interest rates after a 50 basis point cut (excluding cutting interest rates to zero) was in November 2002. The situation at that time was completely different from now. Even after the release of the strong non-farm payrolls report last week, Fed officials still expressed a tendency to cut interest rates further, so Bank of America believes that the Fed is unlikely to change its policy direction because of one month's inflation data.

In analyzing the range of potential rate cuts for the rest of 2024, BofA noted that the impact on the PCE component is critical based on the different possibilities of CPI data performance. If the core CPI reaches 0.3% as BofA expects, but the rise is mainly concentrated in components that have a smaller impact on PCE (such as rent), then the market will re-price the rate cut to a smaller extent. As mentioned earlier, BofA believes that at least 0.3% core PCE month-on-month is needed to make the pricing of the November rate cut 50-50 between holding and a 25 basis point cut. If the core PCE reading is very weak (perhaps at or below 0.1%), the market may reconsider the possibility of a 50 basis point rate cut.

In addition, tonight's CPI data will be a test to measure whether buyers return to the US Treasury market after the recent sell-off. The last time the 10-year Treasury yield exceeded 4% was in early August, when the United States released an unexpectedly weak employment report. If the CPI report confirms that the trend of slowing inflation continues, then Bank of America expects a small return to US Treasury buying in the market, especially in the short and mid-curve segments, as investors remain cautious about election risks and remain skeptical about the possibility of a "hard landing" in the economy.

If the CPI data overturns the narrative of slowing inflation, it may lead to more long positions in US Treasuries being liquidated in the market. There is still room for CTAs (commodity trading advisors) to reduce their historical long positions in 10-year Treasury contracts. Strong CPI readings may not only further exclude expectations of rate cuts in short-term yields, but may also prompt the market to reassess the upper limit of the neutral interest rate, triggering a more parallel yield curve sell-off.

Article forwarded from: Jinshi Data