Before last Friday's non-farm payroll data release, perhaps hardly anyone would have thought that tonight's U.S. CPI data would have much impact on the market. However, everything has undergone significant changes since then...

Against the backdrop of the Federal Reserve's focus shifting towards employment data, inflation data may no longer determine whether the Fed will cut rates by 25 or 50 basis points at a certain meeting. However, on the topic of whether the Fed should continue to cut rates, inflation data still holds crucial sway. Especially in the context of last week's non-farm report, which not only showed that new employment far exceeded expectations but also that wage growth was higher than expected, the Fed may still be unable to assert that the "wage-inflation" spiral will not reignite!

Many industry insiders have said that last week's comprehensive change in market expectations due to the non-farm report has brought greater pressure to this week's U.S. CPI data. If inflation data unexpectedly rises beyond expectations, it is likely to further reduce market expectations for the extent of rate cuts by the Fed before the end of the year, leading to another round of market turmoil. This can already be seen from the "on guard" options volatility indicators...

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Currently, interest rate market expectations have shown that rate cuts are no longer a certainty at the Fed's meeting early next month. If inflation picks up again alongside the strong non-farm data, the possibility of the Fed skipping rate cuts at one of the last two meetings of the year will further increase—the latest pricing in the interest rate market is actually lower than the September dot plot's prediction of an additional 50 basis points of rate cuts for the year.

So, how will the U.S. September CPI data, scheduled to be released at 8:30 PM Beijing time tonight, perform?

An overview of expectations for the U.S. September CPI data:

After the continued decline in August CPI, economists surveyed by the media currently expect that the overall CPI for September will rise by 2.3% year-on-year (lower than August's 2.5%) and by 0.1% month-on-month (lower than August's 0.2%).

Excluding the volatile energy and food prices, the core CPI for September is expected to rise by 3.2% year-on-year (unchanged from the previous value of 3.2%) and by 0.2% month-on-month (lower than August's 0.3%).Market participants are currently quite confident in the further decline of the overall CPI data in the United States. Should the overall CPI increase for September meet expectations and smoothly fall to 2.3%, it would mark the sixth consecutive month of decline and bring it closer to the Federal Reserve's 2% inflation target.

However, it may be premature to celebrate just yet — the main risk point for the market tonight is likely to focus on the core CPI data. The median estimate from the industry currently shows that the year-on-year increase in core CPI for September is likely to remain at 3.2% for the third consecutive month. While the overall CPI is decreasing, the core CPI has consistently "stuck above 3%," which, in the context of the Federal Reserve having already implemented a 50 basis point rate cut, could pose significant risks.

According to media surveys, the expected distribution for the September core CPI month-on-month increase shows that the number of analysts expecting a 0.2% and 0.3% increase is roughly the same, with only one economist (Prestige's Jason Schenker) predicting a mere 0.1% increase. Therefore, people also need to be cautious tonight about the risk of the core CPI month-on-month increase slightly exceeding expectations.

In recent months, due to soaring car insurance prices, the "super core CPI" (which excludes housing and rental costs from service sector data and is particularly valued by the Federal Reserve) has been quite volatile. If this trend continues, it will also be an unfavorable phenomenon.

How do investment banks specifically dissect tonight's data?

Currently, Goldman Sachs expects the core CPI for September to rise by 0.28% month-on-month (above the general expectation of 0.2%) and by 3.16% year-on-year (in line with the general expectation of 3.2%). The bank also expects the overall CPI for September to rise by 0.10%, with a year-on-year increase of 2.27% (in line with the general expectation).Goldman Sachs' forecast for the core CPI in September is in line with the forecast for August. Similar to August, Goldman Sachs expects the downward pressure on prices from the used car and airfare sectors to diminish in September. Due to the recent rebound in used car auction prices, used car prices are expected to rise by 1.0% month-on-month, and airfare prices are expected to increase by 0.5%, reflecting a moderate push from seasonal factors.

Goldman Sachs also highlighted two other key components they anticipate will be present in the September CPI report:

1. Auto insurance. It is expected that auto insurance prices will again rise firmly by 0.7% in September, reflecting the continued increase in premiums, albeit at a slower pace. Higher car prices, repair costs, medical and litigation costs all put pressure on insurance companies to raise prices, but there is a long lag before premiums are passed on to consumers, partly because insurance companies must negotiate price increases with state regulatory agencies.

Now, most of the gap between premiums and costs has been narrowed. Therefore, Goldman Sachs expects the growth rate of auto insurance prices to return to pre-pandemic levels next year.

2. Housing prices. After a significant increase in July and August, Goldman Sachs expects housing inflation to moderate, with the owner's equivalent rent (OER) increasing by 0.35% and single-family home rents increasing by 0.31%. Looking ahead, the strong growth in single-family home rents may lead to their increase exceeding that of OER.

Morgan Stanley's forecast is also similar to Goldman Sachs. Morgan Stanley believes that the decline in the overall inflation rate is mainly attributed to the decrease in gasoline prices. Driven by used cars, goods inflation is expected to show positive growth, and airfare prices will also remain positive.

In addition, Morgan Stanley expects service sector inflation to slow down, mainly due to the retreat of housing inflation rates. The company believes that the recent increase in owner's equivalent rent may be affected by temporary seasonal factors, and expects some correction in this indicator.

Citigroup economists Veronica Clark and Andrew Hollenhorst wrote in a report on Tuesday: "Continued strength in wages poses a clear upside risk to inflation, especially in service sectors such as healthcare."How will tonight's CPI affect the Federal Reserve and financial markets?

According to the CME Group's FedWatch Tool, market traders currently estimate that there is an 85% probability that the Federal Reserve will cut interest rates by 25 basis points at the November meeting, with only a 15% chance of maintaining the status quo.

However, despite the expectation of a 25 basis point rate cut still being the absolute mainstream, UBS economist Brian Rose warned in a report last Friday that "if price increases are faster than expected, coupled with previous strong labor data, the possibility of the Federal Reserve maintaining the status quo at the November meeting will increase."

Bank of America analysts also stated, "Following last Friday's explosive employment report, we believe the importance of this week's CPI has increased. A significant surprise could introduce uncertainty into the easing cycle and bring more volatility to the market."

Matthew Weller from Forex.com and City Index noted that the Federal Reserve has decided to shift its focus from inflation to the labor market, which means that inflation data, including CPI, may not have as much of an impact on the market as before. Although this view has indeed been logical in the past, this month's CPI report could still trigger market fluctuations driven by last Friday's excellent employment report, which may suggest that inflation is facing upward risks again.

Looking at the recent performance of financial markets, due to the significant reduction in expectations for rate cuts, the 10-year U.S. Treasury yield and the U.S. dollar index have both reached their highest levels in about eight weeks. While the U.S. stock market has not been greatly impacted, any reversal in the inflation situation could also bring more uncertainty to the future performance of the U.S. stock market.

Regarding the impact of tonight's CPI performance on the S&P 500 Index, the Goldman Sachs team has made the following prediction as shown in the chart:

Simply put, the lower the CPI data, the greater the market's room for growth, and the worst-case scenario is a core CPI month-on-month increase of more than 0.34%.Goldman Sachs strategist Dominic Wilson summarized that last week's strong non-farm employment report largely changed the backdrop for CPI. A few weeks ago, I believed the market would be quite tolerant of slightly higher inflation data and would be excited about the prospect of accelerated easing in the event of lower-than-expected figures. However, now the risk lies in higher inflation data exacerbating the recent narrative shift—that the Federal Reserve's potential easing actions may be far lower than previously expected.

Wilson believes that people's reaction to higher-than-expected inflation tonight may be greater than to lower-than-expected inflation, so the data may pose a relatively greater downside risk to the stock market.

A survey by 22V Research ahead of tonight's CPI release showed that 42% of investors expected the market's reaction to tonight's CPI to be "mixed/insignificant," 32% of investors believed it would trigger risk aversion, and only 25% of investors expected it to trigger risk appetite.

22V founder Dennis DeBusschere stated, "Overall, people are optimistic about inflation." He also noted that the proportion of investors expecting an economic recession has declined, while the proportion of investors who believe that financial conditions need to tighten has reached the highest level since June.

Ed Clissold from Ned Davis Research believes that for the bull market in stocks to continue, inflation needs to continue to decline, the economy needs to achieve a soft landing, and the earnings growth of American companies needs to remain strong and expand.