Will the "ignored" US inflation be the black swan of the fourth quarter?

As the market generally expects inflation to continue to decline, the door for further Fed rate cuts seems to have opened. However, some analysts warn that inflation is not dead, and the market's disregard for inflation may not last long.

Market generally expects September inflation to continue cooling down

The market expects the CPI for September, to be announced next Thursday, to increase slightly by 0.1% month-on-month, the lowest increase in nearly three months. On a year-on-year basis, it is expected to grow by 2.3%, marking the sixth consecutive month of slowdown and the mildest growth since early 2021.

The core CPI data, excluding food and energy price fluctuations, is expected to increase by 0.2% month-on-month and 3.2% year-on-year. The PPI data to be released next Friday is also expected to slow down.

In addition, the market is also focusing on speeches by many Fed officials in the coming week, as well as the US core PCE inflation for September to be announced on the 31st of this month.

Bloomberg economists, including Anna Wong, analyzed:

"We expect the overall CPI data for September to be relatively mild, and core PCE inflation (the Fed's preferred inflation gauge) may increase at a pace consistent with the Fed's 2% target. In summary, we believe that the inflation report will not have a significant impact on the FOMC's confidence in the continued downward trend of inflation."

However, is inflation really reassuring?

Despite the market's relatively optimistic expectations for inflation, some analysts warn that investors should remain cautious as inflation risks have not completely disappeared.

Analysts point out that the most obvious unexpected factor is geopolitical. The tension in the Middle East shows no signs of easing, and attacks by Israel on Iranian oil facilities or retaliatory actions by Iran in important energy routes could lead to a surge in oil prices, signaling a resurgence of inflationary pressures.

On the other hand, if US employment data continues to grow beyond expectations, the market also needs to be wary of the inflation risks behind wage growth.

The non-farm payroll data released this Friday significantly exceeded expectations, adding signs of a soft landing for the US economy and dampening expectations of a 50 basis point rate cut. Against the backdrop of economic resilience and cooling inflation, the market expects a 99% probability of a 25 basis point rate cut by the Fed in November, and a total of 125 basis points cut by June next year. Furthermore, Fed Chairman Powell hinted on Monday at the National Association for Business Economics that there may be two rate cuts by the end of the year, each by 25 basis points.

The September non-farm report showed that average hourly wages grew by 4% year-on-year, higher than the 3.9% in August, the highest since May. If these trends continue, the market's expectations for long-term rate cuts may appear overly optimistic.

Economist Mohamed El-Erian stated:

"The unexpectedly strong employment report in September reminds people that 'inflation has not disappeared.' This report is a correction of the market's overly aggressive rate cut expectations for the Fed, helping the market more accurately predict the Fed's possible actions. The Fed may need to refocus on curbing price increases and stop discussing whether the Fed should only focus on the employment rate."

Moreover, the US presidential election before the Fed's November meeting will bring more turmoil and uncertainty