Before the release of last week's non-farm payrolls data, no one would have anticipated how important tonight's inflation data would be. Because it will provide clues for the Fed's final two interest rate decisions this year, and validate whether last month's aggressive rate cut was a big mistake.

Originally, the market optimistically believed that when the Fed initiated an easing cycle last month, inflation had already been defeated, and it was expected to cut interest rates at least twice by the end of the year. Therefore, people generally tolerated slightly higher CPI data, and were excited about lower-than-expected CPI.

But the US non-farm employment report released last Friday shattered this optimistic expectation. The increase in employment far exceeded expectations, the unemployment rate unexpectedly dropped to 4.1%, and wage growth rose year-on-year. People began to worry about an overheating economy, and former US Treasury Secretary Summers even called out to the Fed, saying that a 50 basis point rate cut in September would be a mistake.

Now, the CPI data needs to be softer than before in order to alleviate market concerns; higher-than-expected inflation may reverse the current narrative of the "Goldilocks" scenario and have a greater negative impact on the market.

The market expects CPI in September to continue cooling down.

Tonight, the market's focus is all on this heavyweight inflation data. Once inflation picks up, the market is worried that the Fed may pause on rate cuts in November.

Currently, the market's expectation for September's CPI data is:

• CPI rose by 0.1% on a month-on-month basis, lower than the 0.2% of the previous month;

• Core CPI fell to 0.2% on a month-on-month basis, also lower than the previous 0.3%;

• On an annual basis, CPI decreased from a year-on-year 2.5% to a year-on-year 2.3%, the lowest increase since the beginning of 2021;

• Core CPI is expected to remain unchanged for the third consecutive month, with a year-on-year increase of 3.2%;

Goldman Sachs's forecast shows that airfare prices will drop by an average of 3.4%, and used car prices will drop by an average of 1.1%. Thanks to these two factors, inflation pressure in September will weaken.

Housing inflation is also expected to ease, with owner equivalent rent expected to rise by 0.35% compared to the significant increases in July and August, and primary rent rising by 0.31%;

It is worth noting that in recent months, due to the sharp rise in car insurance prices, core CPI has remained stubborn. If this trend continues, the stickiness of core CPI may further intensify. Goldman Sachs expects car insurance prices to rise again by 0.7% in September.

Furthermore, the tension in the Middle East has led to an increase in energy costs, and the strike by dockworkers along the U.S. East Coast and the Gulf of Mexico last week could all lead to a comeback of inflation.

Looking ahead, Goldman Sachs expects the monthly core CPI inflation rate for the remaining time of this year to be around 0.20-0.25%. In 2024, the rebalancing of autos, housing leasing, and labor market will further reduce the inflation rate, but the catch-up inflation of medical care and auto insurance will offset the inflation impact.

Powell gave a speech earlier this week, expressing increasing confidence in inflation returning to the 2% target, and believes that the 50 basis points rate cut in September reflects this confidence. He stated that before the Federal Reserve meeting in November, more employment and inflation reports will be considered.

There is still controversy over the rate cut in November, as inflation risks will shake the market's optimistic expectations.

The minutes released overnight show that Federal Reserve policymakers still have differing views on the aggressive rate decision in September, further reducing expectations for a rate cut. Some Fed officials have recently stated that they are currently inclined to slow down.

"There are concerns that the Fed may pause the rate cut at the next meeting." Sit Investment Associates bond fund manager Bryce Doty said, "If employment is strong, the only factor that can make the Fed continue to cut rates is moderate CPI.

"Even if core CPI unexpectedly rises, we believe that the September report will not change the FOMC's view that inflation is trending downwards." Anna Wong, Chief US Economist at Bloomberg Economics Research Institute, wrote in a report on Thursday.

She expects that following the Federal Open Market Committee's half-point interest rate cut last month, there will be a 25 basis point rate cut in November.

Goldman Sachs analyst Lou Miller said:

"The 10-year yield has risen 45 basis points from its lows. If inflation shows more stubborn signs, it may gradually change the current optimistic expectations, that is, the Fed may cut rates in the case of strong economic growth in the U.S. and improving corporate profit trends."

Goldman Sachs strategist Dominic Wilson said:

"The market's reaction to inflation heating up may be more severe than to inflation cooling down, potentially leading to a downward trend in the stock market."

He added that while data may trigger a market decline, the overall impact may not be as significant as previously expected. There are two specific reasons:

Firstly, as the market has realigned its expectations for future interest rates, especially with a nearly 50 basis point increase in rate expectations by mid-2025, this means the market has already factored in some expectations of future rate hikes, potentially reducing the impact of future data on the market.

Secondly, there is more market concern about future data, which may make the actual market consensus more conservative than it appears on the surface. If actual data performs better than expected, it may actually be more reassuring, as the 'fear' may have already been digested in advance.

Editor/Rocky