How many basis points will the Federal Reserve cut interest rates in September? The non-farm data failed to "make the final decision", and the market will turn its focus to tonight's CPI. Will the two major camps of "25 basis point rate cut and 50 basis point rate cut" usher in the "decisive game"?

At 20:30 Beijing time on Wednesday, the U.S. Bureau of Labor Statistics will release the August CPI data. Currently, Wall Street generally expects:

In August, the U.S. CPI and core CPI both rose by 0.2% month-on-month, both unchanged from the previous month.

In terms of year-on-year growth, the market expects CPI to grow by 2.5% in August, slowing from the previous value of 2.9%, and core CPI to remain unchanged at 3.2%, which is only one-third of what it was two years ago.

Regarding the impact of the August CPI on the Fed's decision, Wells Fargo said that the FOMC will hold an interest rate meeting on September 18, and a rate cut is almost a "foregone conclusion". The August non-farm report is in a "gray area" of obvious weakness and strength, and the upcoming CPI data may become the decisive factor in determining whether to cut interest rates by 25 basis points or 50 basis points.

According to the FedWatch Tool of CME Group, the probability of the Fed cutting interest rates by 25 basis points in September is 67%, and the probability of cutting interest rates by 50 basis points is 33%. Analysts believe that a CPI that meets expectations will consolidate the expectation of a 25 basis point cut, while a cooling that exceeds expectations will increase the possibility of a 50 basis point cut. The weaker the August CPI data, the more favorable it is to the market, and the greater the possibility of a 50 basis point cut.

Rents are expected to return to a downward trend, and prices of air tickets and used cars may rebound

Judging from the sub-item data, analysts believe that after rising in July due to the abnormality in the western region, rental inflation in August is expected to be lower than in July. The main reason for the softening of inflation in recent months is that air tickets and used car prices may rebound, auto insurance inflation is expected to slow down, and clothing prices have become the biggest variable.

First, looking at rents, Nomura economist Aichi Amemiya said that the Bureau of Labor Statistics' All Tenants Return Rent Index (ATRR) is the most reliable leading indicator, which shows that official rent inflation is declining. In addition, the supply of rental apartment buildings remains high, so the underlying trend of rent inflation is unlikely to re-accelerate in the near future. If rent inflation falls, it will help offset the rebound in other service categories (such as health care and air tickets) after an abnormal decline in July.

Goldman Sachs believes that after the sharp increase in July, housing inflation is expected to moderate, with owner equivalent rent (OER) rising by 0.33% and prime rent rising by 0.29%. But looking ahead, a slight acceleration in the growth of single-family home rents may cause OER to exceed rents in the CPI, and overall housing inflation is expected to run at a rate of about 0.3% month-on-month by December 2024.

It is worth mentioning that Goldman Sachs pointed out that the August core CPI forecast is higher than the average growth rate of 0.13% in the past three months. The softening of data in recent months was mainly driven by air ticket prices (an average decrease of 3.4%) and used car prices (an average decrease of 1.1%). However, due to seasonal factors such as the summer travel season, air ticket prices are expected to rebound in August (+1.5%); the decline in used car prices is also milder (-0.5%), reflecting the mixed auction prices.

Secondly, auto insurance inflation is expected to slow down. Auto insurance inflation has been the main driver of U.S. service inflation over the past two years, but there are signs that insurance providers may slow down the pace of price increases in the coming months. Morgan Stanley analysis pointed out that insurance premium applications in July seem to have begun to slow down, and this trend is expected to continue, and auto insurance CPI will have a more obvious slowdown before the end of the year.

In addition, clothing prices may become an important variable influencing the CPI in August. In July, clothing prices saw the biggest drop this year, and analysts are divided on whether prices will fall again in August, which means that any large fluctuations may have an impact on the overall inflation reading.

The Fed's "decisive game" of cutting interest rates by 25 or 50 basis points in September

The non-farm data failed to "make the final decision", and the US CPI may set the tone for a rate cut in September.

Analysts generally believe that a CPI that meets expectations will consolidate expectations of a 25 basis point cut. Oscar Munoz, chief strategist at TD Securities, believes that next week will start with a 25 basis point rate cut. The Federal Reserve's short-term policy interest rate is already close to its highest level in two decades, raising borrowing costs for households, businesses and even the U.S. government. People have been hoping that raising interest rates will help curb inflation without derailing the economy.

Regarding the possibility of a 50 basis point rate cut, Bannockburn Global Forex strategist Marc Chandler said:

The non-farm report did not clear the way for the Fed to cut interest rates by 50 basis points, so CPI seems unlikely, and current expectations are not enough to push the Fed to cut interest rates by 50 basis points. But if there is an unexpected deceleration, the core CPI is -0.3%~-0.5%, which may push us to the edge of 50 basis points, especially since the inflation deceleration is concentrated in the CPI service sector.

However, Citi economists Veronica Clark and Andrew Hollenhorst said in a data preview on September 9:

Inflation data is quickly giving way to labor market data in terms of relevance to the Fed’s policy decisions, but with the August jobs report still inconclusive, the August CPI data could have an impact.

Given the growing downside risks to the labor market and economic activity, the bar for weaker CPI data to signal deeper rate cuts is likely low.

How will the market react?

So, how big of an impact will the CPI announced tonight have on the market?

Goldman Sachs believes that weak data close to expectations may be the best outcome, which will allow some event risk to shift and equity volatility to decline slightly in the short term. Overheated or overcooled data may bring more uncertainty to the Fed's path of rate cuts and the level of US economic growth.

According to Goldman Sachs traders' forecasts, if the core CPI rises by 0.2%-0.25% month-on-month, which is in line with or slightly exceeds market expectations, the S&P 500 index may fluctuate by 0.5%. However, if it is slightly lower than market expectations, the S&P 500 index is expected to achieve a stronger rise.

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