After disappointing employment data, how much will the Fed cut interest rates, and now we need to look at CPI?

How much did the Federal Reserve cut interest rates in September? Last week's release of non-farm employment data was mixed, failing to provide a clear direction, so the market's focus has shifted to the upcoming CPI data.

At 20:30 on Wednesday Beijing time, the US Bureau of Labor Statistics will release the August CPI data. Currently, the market expects both the August US CPI and core CPI to increase by 0.2% month-on-month, remaining unchanged from the previous month.

In terms of year-on-year growth, the market expects the August CPI to increase by 2.5%, slowing down from the previous 2.9%, while the core CPI is expected to remain at 3.2%, only a third of what it was two years ago.

Current futures market pricing indicates a 66% probability of a 25 basis point rate cut by the Federal Reserve on September 18, and a 34% probability of a 50 basis point cut. Analysts believe that meeting the expected CPI will reinforce the expectation of a 25 basis point cut, while any unexpected cooling will increase investors' bets on a 50 basis point cut.

Citigroup economists Veronica Clark and Andrew Hollenhorst stated in a data preview on September 9 that in terms of relevance to Federal Reserve policy decisions, inflation data is quickly giving way to labor market data. However, as the August employment report is inconclusive, the August CPI data may have an impact:

"Given the increasing downside risks to the labor market and economic activity, weaker CPI data and a lower threshold for a larger rate cut may be likely."

The market still holds expectations for a significant 50 basis point rate cut, although it may not happen in September, or even before the US election on November 5.

The market expects the Federal Reserve to cut rates by 150 basis points by the end of January next year. To achieve this level of easing, the Federal Reserve must implement at least 50 basis points of rate cuts in two out of the four meetings during this period.

August CPI: Rent expected to return to a downward trend, clothing prices the biggest variable

Analysts believe that rent inflation in August is expected to be lower than in July, when it rose due to abnormal growth in the western region.

Nomura Securities economist Aichi Amemiya stated that the All Tenants Return to Rent Index (ATRR) from the US Bureau of Labor Statistics is the most reliable leading indicator, indicating that official rent inflation is declining. Additionally, the supply of rental apartments remains high, so the potential trend of rent inflation is unlikely to accelerate again in the near future.

If rent inflation decreases, this will help offset the rebound in other service categories (such as healthcare and airfare) after an abnormal decline in July.

Auto insurance inflation is expected to slow down. Over the past two years, auto insurance inflation has been a major driver of inflation in the US service sector, but there are signs that insurers may slow down the pace of price increases in the coming months.

Morgan Stanley analysis indicates that insurance rate applications in July seem to have started to slow down, and this trend is expected to continue, with a more noticeable slowdown in auto insurance CPI expected by the end of the year Clothing prices may become an important variable affecting the August CPI. In July, clothing prices saw the largest decline so far this year. Analysts have differing opinions on whether prices will drop again in August, indicating that any significant fluctuations could impact the overall inflation reading.