The USA non-farm night last Friday made the 25 basis points rate cut expectation by the Federal Reserve this month the mainstream in the current market. Will this rate cut expectation imbalance continue all the way to the Fed's interest rate decision day next week, 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 in macro factors that determine the path of US interest rates has gradually taken a back seat to non-farm data, tonight, there may still be no Wall Street traders who dare to easily shift their focus elsewhere.

This CPI report released in the week before the Fed interest rate decision day may not have the power to help people lock in the expectation of a 50 basis point rate cut by the Fed this month, but as long as the data can be further lower than expected, at least the hope of a 50 basis point rate cut can be preserved. On the other hand, if the data unexpectedly exceeds expectations, then it can almost be declared that the prospect of a 50 basis point rate cut this month has been shattered in advance, and people can prepare in advance for a 25 basis point rate cut!

So, how will tonight's CPI data perform?

Expectations for US August CPI data

Let's take a look at Wall Street's expectations for tonight's CPI data:

After the CPI returned to the "2 era" in July, economists from institutions surveyed by the media are currently expected to further decline in the year-on-year growth rate of CPI in August in the United States to 2.6% (July was 2.9%), and the month-on-month rate is expected to rise by 0.2% (the same as July's +0.2%).

Excluding the volatile energy and food prices, the core CPI is expected to rise by 3.2% year-on-year in July, with a month-on-month increase of 0.2%, both consistent with the previous month.

The following chart is a summary of the major investment banks estimated by Nick Timiraos from "New Fed Communications":

It is not difficult to see that industry institutions are relatively optimistic about the decline in the year-on-year growth rate of CPI in August. The mainstream estimates of 2.5%-2.6% are significantly lower than the 2.9% in the previous month, a relatively obvious decline in absolute value changes over the months.

In terms of the forecast for the month-on-month change in core CPI, which may be more important to Fed officials, the industry's forecast distribution is very symmetrical this time. Among the 5 analysts surveyed by Bloomberg, 3 expect core CPI to rise by 0.3%, 4 expect it to rise by 0.1%, and the rest forecast it to be 0.2%.

The institutions that have the highest forecast for core CPI (+0.3%) are BNP Paribas, Pantheon, Wells Fargo & Co, and Natixis; on the other hand, the 4 institutions that expect core CPI to rise by only 0.1% are Royal Bank of Canada, TD Securities, Desjardins, and Helaba.

Where will the trend of inflation decline be reflected?

In terms of specific CPI components, the continued decline in oil prices in August will undoubtedly continue to contribute significantly to the overall CPI in the United States. Due to recession fears 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 bullishness of inflation cooling in this field may even continue into September - Brent crude oil prices have fallen below $70 per barrel on Tuesday.

In other highly watched areas of price, it is generally expected within the industry that the rental inflation rate will decrease in August following the rebound in July. This will bring rental inflation back to the long-awaited decline trend that started in June. Due to the significant portion of housing in the CPI, the slowdown in rental growth will provide some room for other service categories (such as medical care and airfares) to rebound slightly after the unusual drop in July, without causing a significant impact on overall inflation.

"We believe that the American Labor Statistics Bureau's All Tenants Return to Rental Index (ATRR) is the most reliable leading indicator, which indicates that official rental inflation is decreasing," said Nomura Securities economist Aichi Amemiya and others in the data preview on September 5th. "In addition, the supply of rental apartments remains high, so the potential trend of rental inflation is unlikely to accelerate again in the near future."

Over the past two years, the rise in car insurance prices has been an important factor in the rise of service industry prices. However, there are signs now that insurance companies may start to slow down their price increases in the coming months.

Morgan Stanley economist Diego Anzoategui stated in a report preview on September 5th, "The growth in insurance premiums in July seems to have started to slow down, indicating that the increase in premiums submitted by insurance companies to regulatory agencies will not be as significant. We expect this trend to continue, and the remaining time of the year will see a more significant deceleration in car insurance rates."

In terms of core commodities, the prices of core commodities fell by 0.3% in July, marking the 13th consecutive monthly decline in the past 14 months. The decline in prices of used cars is the most significant. Analysts currently expect that the overall prices of core commodities and the decline in used car prices in August will be more moderate.

Another category worth noting in the core commodity basket is outfits, which saw the largest price drop since the beginning of the year in July. Currently, analysts have differing views on whether the prices in August will drop again, which means that any significant fluctuations could have a larger impact on the overall inflation reading compared to expectations. Skanda Amarnath, Executive Director of Employ America, predicted in a report on September 10th that seasonal adjustment factors, particularly after pushing up outfit prices at the beginning of the year, could pose downside risks to outfit prices in the August report.

Currently, Goldman Sachs expects the core CPI in the USA to rise by 0.23% in August (the market generally expects a rise of 0.2%), and to rise by 3.17% year-on-year (the market generally expects a rise of 3.2%). The following is Goldman Sachs' specific outlook for the various sub-items of core CPI:

How will tonight's CPI data affect the Federal Reserve?

According to CME's observation tool, the probability of traders in the interest rate futures market expecting the Federal Reserve to cut interest rates by 25 basis points at the next interest rate meeting is 65%, and the probability of a 50 basis point cut is 35%.

Therefore, the role that tonight's CPI data can play is actually quite clear: if the data is higher than expected, it will help people lock in the mainstream expectation of a 25 basis point rate cut next week; if the data is lower than expected, it will further fuel the 'uncertainty' among industry insiders about whether the rate cut next week will be 25 or 50 basis points.

Federal Reserve Chairman Powell said at the global central bank annual meeting held in Jackson Hole, Wyoming last month that the time for policy adjustments has come. The biggest suspense in the industry now is how big of a step the Fed will take in its first rate cut.

Citigroup economists Veronica Clark and Andrew Hollenhorst pointed out in their CPI data preview report released on September 9th that although inflation data is quickly giving way to labor market data in terms of relevance to Fed policy decision-making, the August employment report is inconclusive, so August CPI data could still have an impact.

'Given the increasing downside risks to the labor market and economic activity, weak CPI data may indicate a lower threshold for a larger rate cut,' Citigroup economists said.

In a report to clients last Friday, the Wells Fargo economic team led by Jay Bryson wrote, 'Another benign CPI report could 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 be the consensus.'

As for market impact, analysts from Mitsubishi UFJ Financial Group stated that the data is consistent with the trend of slowing inflation and is crucial for supporting current market expectations of a Fed rate cut. Strong CPI data in August will not prevent the Fed from cutting rates next week, but such a result will further question the aggressive easing bet already reflected in prices, which in turn could bring upside risk to the dollar.

Goldman Sachs listed the potential volatility of the S&P 500 index under different core CPI month-on-month increases for tonight's U.S. stock market trend.

It is worth mentioning that, unlike usual, Goldman Sachs believes that the further the data deviates from the market's expected value (either too high or too low), the less favorable it will be for the performance of US stocks. In the past, similar forecasts from Goldman Sachs often considered lower data to be better.

In response to this, Goldman Sachs team explained that weak data close to expectations may be the best result: it will make the risks of some events become a thing of the past, and the volatility of stocks will also slightly decrease in the short term. However, if the data is considered to be too hot or too cold, it may bring more uncertainty to the Fed's interest rate path or the current direction of the US economy.

Editor/ping