The latest US inflation data arrives tomorrow with markets at present in thrall to several different themes and drivers. Middle East tensions are rife, with focus on oil prices and Israel’s next retaliatory moves against Iran. The China stimulus boost is fading rapidly, which may hurt markets more on a long-term nature. We’ve also seen a shift in the outlook of central banks with Fed rate cut expectations being reined in after Friday’s blowout monthly jobs report, while the BoJ, ECB and BoE have all seemingly turned more dovish.
In this context, the US CPI data may not shift the dial too much, especially as the Fed is now more focused on labour market data, as part of its dual mandate. A series of strong economic releases has also seen money markets now favour a more gradual rate cutting cycle. In fact, some commentators are touting the ‘no landing’ idea in which the Fed pauses to assess the economy after the jumbo-sized 50bps rate cut in August.
Expectations for September prices
Consensus looks for headline US consumer prices to rise +0.1% m/m in September, down one-tenth from the prior month, while the annual print is forecast at 2.3%, from 2.5% in August. The core rate, which excludes volatile food and energy components, is expected to increase at +0.2% m/m, one-tenth below the August figure, with the annual rate unchanged at 3.2%.
Inflation concerns are placed more on rents and prices for services. Rents impact the inflation data with a lag, but the expected moderation is taking longer than anticipated. The owners’ equivalent rent (OER) contribution in August was another upside surprise, and the latest drop in mortgage rates could again spark upside housing and rent costs. In addition, the latest NFP report saw wage gains back to 4%. That seems too high for rents and CPI in general to meet the Fed’s objectives. After a summer scare, the job market appears to be getting tighter again, with unemployment falling and the headline figure averaging 186k per month over the past three months.
Market reaction
An inline report is likely to confirm current market pricing of two 25bps rate cuts at the Fed’s next meetings in November and December. Readings of around 0.2% m/m (0.17% to be exact) are needed to keep the annual rate tracking towards the 2% y/y target. That shouldn’t move the dollar too much as it will reinforce policymakers’ confidence that the disinflation process is intact. It would likely keep the focus on upcoming labour market data and other activity indicators, which are next released in a few weeks.
A hotter than expected report, say a 0.3% core m/m print, may boost the greenback and see it continue its impressive rebound from long-term support around 100.61 on the Dollar Index. The midpoint of the April to September dollar sell-off sits above at 103.33, along with the 100-day simple moving average. On the flipside, softer data is needed to see some selling. The major retracement Fibonacci level (38.2%) of that move is at 102.58. But the buck could be supported into the US election early next month, with Trump again inching ahead in some polls and as investors take up more defensive positioning.