The United States' non-farm data in September far exceeded expectations, paving the way for an 'economic soft landing.' The next key question is whether inflation will make a comeback.

The U.S. will release CPI data for September this Thursday, which will be crucial in disrupting U.S. stock markets and interest rate cut expectations. Currently, the media generally predicts a 0.1% month-on-month increase in overall CPI for September, and a 0.2% increase in core CPI; looking at the year-on-year figures, the overall CPI is expected to drop from 2.5% in August to 2.3%, while core CPI is expected to remain stable, increasing by 3.2% year-on-year.

It is worth mentioning that UBS Group believes that inflation is more intense, with its forecast showing a 0.31% month-on-month increase in core CPI for September, and a year-on-year increase of 3.3%. UBS Group stated that this may serve as a wake-up call for the U.S. Federal Open Market Committee (FOMC) - indicating that the United States has not yet shaken off the troubles of inflation.

Goldman Sachs' forecast is also higher than the market's general expectations, with core CPI expected to grow by 0.28%. Goldman Sachs also predicts a 0.23% growth in core service CPI for September, surpassing the average growth rate of the previous three months by 0.13%.

Some analysts believe that the September CPI report higher than expected and the possibility of inflation picking up in the coming months will further constrain the Fed's rate-cutting pace, more importantly, it will also hinder the rise of US stocks.

Last week's strong non-farm employment report may have paved the way for the economy to achieve a 'soft landing' amidst declining inflation. However, it has also forced investors to reduce their bets on a Fed rate cut, while raising doubts about whether the Fed's 50 basis point rate cut last month was a mistake.

Is the road to declining inflation not going to be 'smooth sailing'?

Goldman Sachs pointed out in its latest report that auto insurance prices will rise again, reflecting the continuous growth in premiums despite a slower growth rate. Additionally, after a significant increase in recent months, it is expected that housing inflation will slow down, with homeowner equivalent rents rising by 0.35% and primary rents rising by 0.31%.

However, Nancy Tengler, Chief Executive Officer of Laffer Tengler, stated that housing costs are one of the most persistent drivers of inflation this year, still remaining at high levels. Furthermore, escalating energy costs due to tensions in the Middle East, as well as last week's dockworker strike, have raised concerns about a resurgence of inflation this year. Some analysts believe:

The potential consequences of rising energy costs and a three-day port strike may only cause a "short-term disruption" to the deflation trend, and temporarily raise CPI, but will not lead to "sustained inflation" in the USA economy.

In addition, looking at the September non-farm report, wage inflation remains high. Steve Wyett, Chief Investment Strategist at BOK Financial, stated that the average hourly wage in the September employment report increased by 0.4% month-on-month, higher than expected, combined with a "stunning" wage agreement for port workers. This serves as a reminder to investors that inflation remains an issue for the Federal Reserve. Compared to the size of the workforce, the number of port workers is not enough to have a direct impact on overall wage levels, but progress towards achieving the Federal Reserve's 2% target may still be slow.

Regarding the impact on the U.S. stock market, Mike Reynolds, Deputy Chief Investment Officer at Glenmede Trust, stated:

This may be some of the 'last clean inflation data before some 'countertrend' that will need to be dealt with in the coming months. If CPI data starts moving in the wrong direction, it will have a serious impact on the stock market and economy, and in extreme cases, the Federal Reserve may start raising interest rates again... This is certainly not the base case, but as a tail risk for the stock market, it is something to watch out for.

Was the Federal Reserve too aggressive in cutting rates?

Looking at the latest economic data, the September non-farm payrolls exceeded expectations by a large margin, while core CPI might rebound. Did the Federal Reserve go overboard with a 50-basis-point rate cut last month?

In Tengler's view:

The market faces the risk that the Federal Reserve's rate cuts are too aggressive, as inflation has not been contained. Every month, we see the core CPI showing a similar moderate upward trend, which is not the deflation we hope to see in the overall economy.

UBS Group believes that although the latest minutes of the Federal Reserve meeting may show that participants generally agreed on a decision to cut rates by 50 basis points, this may mask more uncertainty. The minutes may also indicate that participants do not want to see the 50 basis point rate cut as a new pace of rate cuts.

In addition, there are a large number of Federal Reserve officials' speeches to digest this week, including Federal Reserve Board Member Kugler and Bowman speaking again, as well as many regional Federal Reserve Bank Presidents speaking. Vice Chair Jefferson will also give his views on the discount window's history.

Editor/Rocky