Source: Wind

Consumer prices in the US rose 2.5% year on year in August, far lower than 2.9% in the previous month. However, the core consumer price index (excluding food and energy costs) was up 0.3% from July and 3.2% from the same period last year.

This higher-than-expected core inflation data will be a problem for the Federal Reserve to cut interest rates by 50 basis points next Wednesday. Therefore, today's core CPI data should reduce the possibility of cutting interest rates by 50 basis points, but it will also give the Federal Reserve enough confidence that it can begin a series of moderate interest rate cuts.

In the futures market, market pricing is currently trending towards the Federal Reserve cutting interest rates by 25 basis points next week. Federal Reserve traders almost agree that the rate cut will be 25 basis points instead of 50 basis points, although of course this is always likely to change in the next few days.

Major asset classes showed a corresponding response. The US dollar index and US bond yields rose in a straight line, gold in the short term, and US stock futures dived.

Since recent weeks, the focus of Federal Reserve officials has also changed, from a strong focus on curbing inflation to concerns about the state of the job market. Since April, the recruitment rate has slowed markedly. The average monthly increase in non-farm payrolls has dropped from 0.255 million in the previous five months to 0.135 million, and job vacancies have also declined.

The current level of inflation may prompt Federal Reserve officials to choose to cut interest rates by 25 basis points at next week's policy meeting. As downside risks to the labor market and economic activity increase, if CPI data is weak enough, the threshold for large-scale interest rate cuts may become lower.

Although inflation has eased somewhat, it is still above the Federal Reserve's 2% target. However, recent economic data, including a weak labor market, shows that the Federal Reserve will almost certainly cut interest rates at the end of the September 18 policy meeting.

Federal Reserve Chairman Powell said at the Kansas City Federal Reserve Annual Economic Symposium held in Jackson Hole, Wyoming in August: “The time is ripe for policy adjustments.”

Selected views on interest rate cuts

Yoshigami, CEO of Destination Wealth Management

He said that if the Federal Reserve cuts interest rates more drastically, this will indicate that the central bank is ready to act without conveying deep concerns about a wider economic downturn.

“I wouldn't be surprised if they cut interest rates directly by 50 basis points,” Yoshigami said. He also mentioned, “On the one hand, this will be seen as a positive sign that the Federal Reserve is taking necessary measures to support employment growth. I think the Federal Reserve is now ready to pull out of austerity before then.”

Yoshigami acknowledged that larger interest rate cuts might heighten concerns about the impending “American recession,” but he insisted that this view was exaggerated. He pointed out that the unemployment rate and interest rates have remained at historically low levels, and corporate profits have also been strong.

Nobel laureate economist Stiglitz

He also expressed similar views. Stiglitz believes that the Federal Reserve should cut interest rates by half a percentage point at the next meeting, and pointed out that the previous austerity policy “went too far and too fast.”

Thanos Papasavas, founder and chief investment officer of ABP Investments

He believes that the market's “growing concern” about a potential US recession. The research firm recently adjusted the probability of a US recession from a “moderate” 25% in June to a “relatively manageable” 30%. However, Papasavas pointed out that the basic components of the economy — manufacturing and unemployment — “remain resilient.”

Lagarias, chief economist at Forvis Mazars

He said that a sharp interest rate cut could be “very dangerous.” “I don't think it's urgent to cut interest rates by 50 basis points,” he said.

He added: “A 50 basis point cut in interest rates could send the wrong message to the market and economy. This could send a signal of urgency, or even become a self-fulfilling prophecy.”

Samuel Thomas, Chief American Economist at Pantheon Macroeconomics

He said that due to the general decline in the number of employed people and the sharp drop in the number of people employed in the previous few months, “the summer slowdown may become worse in a few months,” and the downward trend in the number of recruits “will continue for a long time.”

Currently, I still tend to cut interest rates by 25 basis points this month.” “But by the November meeting, there are still two employment reports in hand, and the reasons for cutting interest rates quickly will be overwhelming.”

In fact, although market pricing indicates a moderate start to the September rate cut, it is expected that interest rates will be cut by 0.5 percentage points in November, and interest rates may be cut again in December.

The impact of CPI data on the future market

Regarding the main reason for the recent market correction, some observers believe that it is mainly due to concerns that the Federal Reserve is lagging behind the situation, especially in the context of the deterioration of the US economy.

Morgan Stanley's stock strategist Michael Wilson believes that the US stock market is “in line” with deteriorating economic fundamentals. “If the US economy has a hard landing, the decline in the US stock market will be even greater, which is why the market is now very sensitive to some economic data,” he said.

UBS believes that the quality of the rebound after the market crash in early August was poor, causing the market to be weak, and there may be a 10% to 15% correction in the next few months. Rebecca Cheong, head of US stock derivatives strategy at the agency, said: “From a tactical point of view, I'm short on US stocks for the next two months.”

She pointed out, “The market is weak, and any published economic data, even a slight disappointment, will trigger large-scale liquidation of positions. In the absence of major news events, the moderate sell-off in the market is likely to continue.”

At the beginning of August, the S&P 500 index experienced a large-scale sell-off. Investors' concerns about the economic slowdown intensified, and large stocks such as Nvidia were sold one after another. A hedge fund deal involving yen was closed, and the global market was affected. However, the S&P 500 quickly rebounded and partially recovered lost ground, but technology stocks were still far below their highs.

Preferences in an inflationary environment

Although the Federal Reserve is expected to cut interest rates next week, the market's love for cash continues. According to data from the Association of American Investment Companies, the current asset size of US money market funds has reached 6.3 trillion US dollars, another record high. These funds attract capital inflows due to their favorable returns.

Bank of America expects these funds to continue to flow in even after the Federal Reserve starts cutting interest rates. “Unless interest rates fall below 2%, the Fed's interest rate cut is unlikely to release MMF cash. Bank of America strategist Mark Cabana wrote in a report last week: “Federal Reserve interest rate cuts should slow MMF inflows, but outflows are unlikely unless interest rate cuts are much higher than market expectations.”

He said history shows that when investors do withdraw from money market funds, they will switch to fixed income rather than stocks. Peter Crane, founder of Crane Data, which tracks the industry, explained that as the Federal Reserve cuts interest rates, institutional investors will also continue to enter money market funds because any cash they invest in direct money market investments such as short-term treasury bonds will be impacted by interest rate cuts faster than money market funds.

“IMF yields follow the trend of the Federal Reserve, so within a month after the Fed takes any action, the IMF yield should drop by 25 basis points,” Crane said.

Edit/Rocky