Last Friday's non farm night in the United States made the expectation of a 25 basis point rate cut by the Federal Reserve this month the mainstream in the current market. And whether the tilt of the expected interest rate cut "balance" will continue until next week's Federal Reserve interest rate day, tonight may be the last "decisive moment"
According to the schedule, the US Bureau of Labor Statistics will release the August CPI report at 8:30 pm Beijing time tonight.
Although the influence of inflation data has gradually faded behind non farm payroll data in determining the macro factors that determine the path of US interest rates, tonight, there may still be no Wall Street trader who dares to easily shift their focus elsewhere.
This CPI report, released a week before the Federal Reserve's interest rate day, may not be powerful enough to help people lock in the expectation of a 50 basis point rate cut this month, but as long as the data falls further below expectations, at least hope of a 50 basis point rate cut should be preserved. On the other hand, if the data unexpectedly exceeds expectations, it can almost declare the early collapse of the prospect of 50 interest rate cuts this month, and people can already prepare for a 25 basis point interest rate cut in advance!
So, how will tonight's CPI data perform?
Overview of August CPI Data Expectations in the United States
Let's first take a look at Wall Street's expectations for tonight's CPI data:
After the CPI returned to the "2 era" in July, institutional economists surveyed by the media currently predict that the year-on-year increase in US CPI in August is expected to further fall to 2.6% (2.9% in July), and the month on month increase is expected to rise by 0.2% (unchanged from+0.2% in July).
Excluding volatile energy and food prices, the core CPI for July is expected to increase by 3.2% year-on-year and 0.2% month on month, both consistent with the previous month.
The following chart is a summary of Nick Timiraos' estimates for major investment banks from the New Federal Reserve News Agency:
It is not difficult to see that industry institutions are relatively optimistic about the downward trend of the year-on-year increase in CPI in August - with a mainstream estimate of 2.5% -2.6%, a sharp decrease of 0.3-0.4 percentage points from the previous month's 2.9%, which is a significant decrease in absolute value changes over the years.
In terms of the core CPI month on month forecast, which may be more valued by Federal Reserve officials, the industry's forecast distribution for this data is very symmetrical this time. According to a Bloomberg survey, five analysts expect the core CPI to rise by 0.3%, four analysts expect it to rise by 0.1%, and the rest of the forecasts are all 0.2%.
The banks with the highest core CPI forecast (+0.3%) are BNP Paribas, Pantheon, Wells Fargo, and BNP Paribas; On the other hand, the four institutions that are expected to see a core CPI increase of only 0.1% are Royal Bank of Canada, TD Securities, Desjardins, and Helaba Bank.
Where will the downward trend of inflation be reflected?
In terms of specific CPI sub items, the decline in oil prices in August will undoubtedly continue to contribute significantly to the sustained cooling of the overall CPI in the United States. Affected by recession panic and demand concerns, international oil prices fell by over 5% last month, and domestic gasoline prices in the United States also fell significantly. It can be foreseen that the positive trend of inflation cooling in this field is even highly likely to continue until September - Brent crude oil prices fell below $70 per barrel on Tuesday.
In some of the most closely watched areas of prices, the industry generally expects that the rental inflation rate will rebound in July and then decline in August. This will bring rental inflation back to the long anticipated downward trend that began in June. Due to the fact that housing accounts for the largest share of CPI, the slowdown in rental growth will provide some room for other service categories (such as healthcare and air tickets) to rebound slightly after an abnormal decline in July, without having a significant impact on overall inflation.
We believe that the All Tenant Return Rent Index (ATRR) from the US Bureau of Labor Statistics is the most reliable leading indicator, indicating that official rent inflation is decreasing, "Nomura economist Aichi Amemiya et al. said in their data forecast on September 5th." In addition, the supply of rental apartment buildings remains high, so the potential trend of rent inflation is unlikely to accelerate again in the near future
In the past two years, the increase in car insurance prices has been an important reason for the rise in prices in the service industry. However, there are indications that insurance companies may begin to slow down their price hikes in the coming months.
Morgan Stanley economist Diego Anzoategui stated in a preview of the report on September 5th that "premium applications in July seem to have begun to slow down, indicating that insurance companies are not submitting significant premium increases to regulatory agencies. We expect this trend to continue to decline, and there will be a more significant slowdown in car insurance premiums for the rest of this year
In terms of core commodities, the prices of core commodities fell by 0.3% month on month in July, marking the 13th month on month decline in the past 14 months, with second-hand car prices experiencing the most significant decline. Currently, analysts generally expect that the overall price decline of core commodities and second-hand car prices in August will be relatively moderate.
Another noteworthy category in the core commodity basket is clothing, which experienced its largest price drop since the beginning of this year in July. At present, analysts have different opinions on whether prices will fall again in August, which means that any significant fluctuations could have a significant impact on overall inflation readings compared to expectations. Skanda Amarnath, Executive Director of Employ America, predicted in a report on September 10th that seasonal adjustment factors may pose a downward risk to clothing prices, especially in the August report, after pushing up clothing prices at the beginning of the year.
Currently, Goldman Sachs expects the US core CPI to rise by 0.23% in August (the market generally expects a 0.2% increase), and by 3.17% year-on-year (the market generally expects a 3.2% increase). The following chart shows Goldman Sachs' specific outlook for each core CPI sub item:
How will tonight's CPI data affect the Federal Reserve?
According to the Chicago Mercantile Exchange's Federal Reserve Watch tool, traders in the interest rate futures market currently expect a 65% probability of a 25 basis point rate cut and a 35% probability of a 50 basis point rate cut at next week's interest rate meeting.
Therefore, the role that tonight's CPI data can play is quite clear: if the data is higher than expected, it will help people lock in the mainstream expectation of a 25 basis point interest rate cut next week; If the data is lower than expected, it will further ignite the "uncertainty" in the industry about whether to cut interest rates by 25 basis points or 50 basis points next week.
Federal Reserve Chairman Powell stated at the global central bank annual meeting held in Jackson Hole, Wyoming last month that the time for policy adjustment has arrived. The biggest suspense in the industry now is how far the Federal Reserve will go in its first interest rate cut?
Citi economists Veronica Clark and Andrew Hollenhorst pointed out in their CPI data preview report released on September 9th that, in terms of the relevance of Federal Reserve policy decisions, although inflation data is rapidly giving way to labor market data, the August CPI data may still have an impact due to the inconclusive August employment report.
Given the increasing downside risks in the labor market and economic activity, the threshold for weaker CPI data and greater interest rate cuts may be low, "said Citigroup economists.
The economics team of Wells Fargo, led by Jay Bryson, wrote in a report to clients last Friday that "another benign CPI report may give FOMC members enough 'confidence' to believe that inflation is sustainably returning to 2%, thereby supporting a 50 basis point rate cut. On the other hand, if inflation data is hotter than expected, a 25 basis point rate cut at the September meeting is likely to become a consensus
In terms of market impact, analysts from Mitsubishi UFJ Financial Group stated that the data is consistent with the slowing trend of inflation, which is crucial to support the current expectation of interest rate cuts by the Federal Reserve. The strong CPI data in August will not prevent the Federal Reserve from cutting interest rates next week, but such a result will further question the aggressive easing bets currently reflected in prices, which in turn should bring upward risks to the US dollar.
For tonight's trend of the US stock market, Goldman Sachs has listed the potential volatility of the S&P 500 index under different CPI core month on month increases.
It is worth mentioning that, slightly different from usual, Goldman Sachs believes that the more the data deviates from the median market expectations (too high or too low), the more unfavorable it will be for the performance of the US stock market. In the past, Goldman Sachs' similar predictions often believed that the lower the data, the better.
In response, the Goldman Sachs team explained that weak data close to expectations may be the best outcome: this will make the risks of some events a thing of the past, and stock volatility will also slightly decrease in the short term. If the data is considered too hot or too cold, it may bring more uncertainty to the Federal Reserve's interest rate cut path or the current direction of the US economy.