The September U.S. Consumer Price Index tops this week’s economic reports. With year-on-year total and core CPI inflation rates still above the Federal Reserve’s 2% target, traders and investors will be watching for signs that give the Fed license to cut rates on November 7. The potential that inflation rates are too high presents downside risks to equity markets and commodity prices because elevated inflation rates could keep the Fed from cutting interest rates next month.
Consumer Inflation in Focus
This week’s September CPI report will be critical for Fed interest rate policy expectations because labor market and inflation data are the Fed’s main policy concerns. With the potential to shape Fed policies, which are front and center for financial markets, the CPI report has the potential to impact financial markets from equities and bonds to industrial commodities and the dollar.
Year-on-year total CPI inflation slowed in August to the lowest year-on-year pace since February 2021. Total CPI decelerated to 2.5% from 2.9%, although year-on-year core CPI was unchanged at a relatively high 3.2%. Both total and core year-on-year CPI rates are still elevated and above the Fed’s 2% target.
Inflation has been easing slowly, but base effects threaten to keep year-on-year total CPI and core CPI above the Fed’s 2% target until the first half of 2025. Nevertheless, year-on-year CPI inflation rates appear likely to have made more progress toward 2% in September, and Prestige Economics is forecasting year-on-year CPI to be 2.4%, with core CPI at 3.1%.
Expectations for Fed Interest Rate Cuts
As the Fed carefully weighs the importance of labor market and inflation data, this week’s CPI report will be more critical for Fed policy expectations in the wake of last week’s Employment Situation Report — informally called the jobs report by economists and analysts. September payrolls and unemployment data were much stronger than expected with strong payroll gains of 254,000, upward revisions to payrolls of 72,000, and a drop in the unemployment rate to 4.1%.
Following the release of the strong September jobs report, the potential for a 0.5% Fed rate cut on November 7 fell to zero in the CME FedWatch Tool on October 6, while the potential for a 0.25% interest rate cut rose to 97.4% and the chance that the Fed will leave interest rates unchanged rose to 2.6%.
Just one week prior, on September 27, the CME FedWatch Tool reflected the chance of a 0.5% Fed interest rate cut on November 7 at 53.3%. Meanwhile, the chance of a 0.25% interest rate cut was 46.7%, and the chance of no changes in interest rate policies was zero. The change in the CME FedWatch Tool expectations reflects just how important the strong September jobs report was for shifting Fed policy expectations.
The CME FedWatch Tool reflects that there is no urgency to cut interest rates due to the strength of the labor market. However, if inflation eases in September, the Fed will have more wiggle room to cut interest rates next month.
Financial Market Implications
If the September CPI report does not show a further easing of year-on-year consumer inflation, expectations that the Fed will leave interest rates unchanged on November 7 will likely rise. These dynamics would likely support the dollar but potentially hold mixed to negative implications for equities, bond prices, and industrial commodity prices.
However, if the September CPI report shows an easing of year-on-year inflationary pressures from August, the potential for a 0.5% rate cut would likely increase, weighing on the greenback but supporting equities, bond prices, and industrial commodity prices.
What do you expect for the September CPI inflation report?
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