November rate cut will be ‘less of a sure thing’ if September CPI print is very strong
Bank of America warns that a strong September CPI report could jeopardize the likelihood of a Federal Reserve interest rate cut in November. Following a robust jobs report, expectations for a 25 basis point cut remain, but a hotter CPI could shift market sentiment. The options market anticipates significant movement in the S&P 500, with volatility expected if inflation surprises. Currently, the odds of the Fed maintaining rates have increased, while the probability of a 25bp cut has decreased. Investors are advised to monitor large-cap equity and Treasury ETFs.
Bank of America said the consumer inflation report due this week has increased in importance after the September U.S. jobs report smashed expectations, and a hotter-than-expected CPI print could cast doubt on the Federal Reserve cutting interest rates next month.
The September Consumer Price Index may prove to be market moving in light of last week's report of U.S. nonfarm payrolls swelling by 254K vs. 132.5K expected. BofA estimates a 0.3% m/m core CPI print, resulting in two consecutive firm core CPI prints.
“Should our forecast prove correct, it would further cement a 25 basis points cut in November,” Ohsung Kwon, equity and quant strategist at BofA, said, in a Sunday note. “Meanwhile, inflation is unlikely to be soft enough to warrant a 50bp cut, but a very strong print could make a cut in November less of a sure thing.” The report is due Thursday morning.
Markets after the jobs report priced out 13 basis points of rate cuts through year-end, Kwon said, and stocks (SP500)(DJI)(COMP:IND) jumped. Traders priced out the probability of a large 50bp rate cut in November after the jobs report.
Kwon doesn’t see a material upside risk to BofA’s inflation forecast. “While job growth was stronger than expected in September, the totality of labor market data suggests demand and supply are in better balance,” he said. “Indeed, the ongoing decline in the quits rate suggests that wage and price inflation should continue to moderate.”
For the CPI report, the options market is pricing in a move of 109bps on the S&P 500 (S&P 500) this Thursday, up from 91bps as of last week, which would be the largest CPI day move since May, Kwon said. The 3-month average move is 70bps.
“While stocks should be able to withstand a slight upside surprise in inflation given improving macro data, a sizeable surprise could bring uncertainty on the easing cycle and more volatility into the market,” the strategist said.
On Monday, odds of the Fed standing pat next month jumped to 15.8% from 2.6% on Friday, according to the CME FedWatch tool. The chance of a standard cut of 25bp declined to 84.2% from 97.4%.
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