The market is no longer betting on a 50 basis point rate cut in September

Due to the rise in housing and travel prices, unexpected inflation in the United States in August weakened the possibility of a significant rate cut by the Federal Reserve.

The US CPI for August released overnight showed a year-on-year increase of 2.5%, with the core index unexpectedly rising to 0.3% month-on-month, marking the largest increase in four months. This indicates that inflation still has stickiness, essentially locking in a 25 basis point rate cut by the Federal Reserve at its meeting next week.

After the data was released, the pricing in the forward market expects a rate cut of about 26 basis points in September and 104 basis points in December. CME Group tools show that the probability of a 50 basis point rate cut in September by traders has dropped to less than 20%, while the probability of a 25 basis point cut has risen to 83%.

Citigroup, which had been betting on a 50 basis point rate cut in September, has withdrawn that expectation, but still expects a total cut of 125 basis points by the end of the year. JPMorgan Chase, on the other hand, maintains its expectation of a 50 basis point cut.

Looking at the breakdown of CPI prices, the cost of housing is the main factor driving inflation. Housing prices rose by 0.5% month-on-month in August, with the Owner's Equivalent Rent (OER) index also rising by 0.5%, marking the largest increase since January and the second consecutive monthly increase, breaking the common expectation of a slowdown and potentially maintaining an upward trend for a longer period.

Renowned financial journalist Nick Timiraos, known as the "New Fed News Agency," commented in an article that the relatively strong housing inflation in August led to a slightly higher-than-expected increase in core prices, which may make it more difficult for Fed officials to push for a larger 50 basis point rate cut at the upcoming Fed meeting.

According to a commentary by Zhongjin Analysis reported, if we judge the future trend of CPI rent inflation based on the Zillow Rent Index, it is likely that the rent inflation in the next 6 months will be difficult to maintain below 0.2% month-on-month. This implies that the anti-inflation effect from the slowdown in rent may be relatively limited.

Apart from housing, increases in airfares, clothing, daycare, and preschool education have also driven the growth in prepaid expenses, while car insurance premiums and hotel accommodation costs continue to rise. Even after excluding housing and energy, service prices achieved a 0.3% month-on-month increase, the largest since April.

Zachary Griffiths, Director of US Investment Ratings and Macro Strategy at CreditSights, stated:

"Although we have never been in the camp expecting a 50 basis point rate cut, the slight uptick in CPI seems enough to deter policymakers from considering any more significant measures."