The market refocuses on the US CPI! It is crucial whether the Federal Reserve will press the "pause button" on interest rate cuts

According to the financial news app Zhitong Finance, the Wall Street financial giant Bank of America recently released a report stating that the upcoming release of the Consumer Price Index (CPI) data report this week has become significantly more important after the incredibly strong September non-farm payroll data and the unexpected drop in the unemployment rate shattered expectations of a Fed rate cut. Higher-than-expected CPI data may lead investors to increasingly doubt whether the Fed will choose to cut rates next month. For months, non-farm payrolls have been the most closely watched U.S. economic data by global investors, as the strength of the non-farm data is crucial for the pace and timing of Fed rate cuts. However, this week investors are refocusing on the U.S. CPI data report, which is crucial for determining whether the Fed will continue to cut rates this year. The September CPI data will be released on Thursday night Beijing time.

The latest release of incredibly strong U.S. non-farm payroll data, along with the unexpected drop in the unemployment rate, has led traders to significantly reduce their bets on the Fed continuing to cut rates by 50 basis points. Since August 1, the pricing in the interest rate futures market has for the first time implied that the Fed's benchmark rate cut by the end of the year will be less than 50 basis points, indicating that some traders are even pricing in the possibility that the Fed may pause its rate cut process at the FOMC meetings in November or December.

Traders in the interest rate futures market now believe that there is an 85% chance that the Fed will switch to a 25 basis point rate cut in November. In contrast, before the non-farm payroll report was released, the probability of a 25 basis point rate cut in the bond market barely exceeded 50%, while the probability of a 50 basis point rate cut was once higher than that of a 25 basis point cut.

In the U.S. bond trading market, as most bond traders globally have at least temporarily abandoned their bullish bets on U.S. Treasuries, the yield on the 10-year U.S. Treasury, known as the "global asset pricing anchor," has risen to its highest level since August, breaking through the key 4% yield level. Short-term U.S. Treasuries with maturities of 2 years and below have performed particularly poorly, signaling a temporary reversal in a key part of the U.S. Treasury yield curve and highlighting a significant cooling of market expectations for the Fed's future rate cut path.

A rate market strategist from TD Securities stated, "The market discussion is even shifting to whether rate cuts will continue." "From an economic perspective, the situation is not so bad, leading the market to reprice the Fed's rate cut path." TD Securities continues to expect the Fed to choose a 25 basis point rate cut in November, rather than persisting with a 50 basis point cut.

According to data released by the U.S. government on Friday, following the unexpectedly upward revisions of 72,000 non-farm payrolls in the previous two months, non-farm payrolls in September saw a significant increase of 254,000, marking the largest increase in non-farm payrolls in six months. In contrast, economists' median expectation was only 150,000, and the latest non-farm payroll exceeded even the most optimistic expectations shown in media surveys. According to another data released by the U.S. Bureau of Labor Statistics on Friday, the unemployment rate unexpectedly dropped to 4.1%, and average hourly earnings grew by 0.4% month-on-month, both figures surpassing economists' expectations (unemployment rate expectation was 4.2% and hourly wage growth rate was 0.3%) Combining other data released last week, it shows that American companies still have a healthy demand for workers, and the number of layoffs remains very low. Earlier economic data also indicates the resilience of the American economy. The non-farm employment report may significantly alleviate economists' concerns about the US labor market cooling too quickly and the fear of an economic recession. The situation in the American labor market is closely related to American consumer spending. Employment scale and wage income are crucial for overall consumption. Consumer spending resilience will undoubtedly continue to drive the US economic giant ship forward, as 70%-80% of the components of the US GDP are closely related to consumption.

Bank of America predicts: if CPI exceeds expectations, the expectation of "pausing rate cuts" may sweep the financial markets

The September US CPI data to be released this week may provide a clearer judgment on the Fed's rate cut path. Bank of America predicts that the month-on-month increase in the core CPI index in September will be 0.3%, which is basically in line with economists' expectations. If this expectation becomes reality, it may lead to two consecutive strong performances of the core CPI index. In terms of overall CPI expectations, Bank of America expects a month-on-month increase of 0.1%, consistent with the general expectation of economists covered by institutional surveys, possibly marking the smallest increase in three months. In terms of year-on-year comparison, economists generally expect a 2.3% increase in overall CPI in September, compared to the previous value of 2.5%; they expect the core CPI to increase by 3.2% year-on-year, consistent with the previous value.

Ohsung Kwon, a stock and quantitative strategist at Bank of America, stated in a report released on Sunday, "If our forecast proves to be correct, it will further solidify the market's expectation of a 25 basis point rate cut by the Fed in November." "At the same time, inflation is unlikely to be weak enough to warrant a 50 basis point rate cut, but very strong inflation data may make the Fed's rate cut process in November less certain, and the market's call for a pause in rate cuts may become stronger." This crucial CPI data report will be released on Thursday night Beijing time.

The Bank of America strategy team led by Ohsung Kwon stated that after the employment report was released, the market's forecast for the Fed's rate cut before the end of the year was less than 50 basis points, but the US stock market rose due to expectations of a "soft landing" for the US economy. After the non-farm employment report was released, traders in the financial markets basically ruled out the possibility of a significant 50 basis point rate cut by the Fed in November.

Strategist Kwon does not believe that there is substantial upside risk in Bank of America's latest inflation forecast. "Although the non-farm employment growth in September was stronger than market expectations, the overall situation of labor market data indicates that demand and supply are in a better balance," the team led by this strategist stated. "In fact, the continued downward trend in the quit rate suggests that wage and price inflation should continue to moderate." Kwon stated that the options market expects the S&P 500 index to fluctuate by approximately 109 basis points this Thursday, in response to the expected volatility from the Consumer Price Index report. This is an increase from the 91 basis points fluctuation seen last week, making it the largest "U.S. Consumer Price Index Day" stock market volatility since May. The average volatility of the S&P 500 index over a 3-month benchmark period is currently around 70 basis points.

The strategist also mentioned, "Although the U.S. stock market should be able to withstand a slight unexpected increase in inflation given the continuous improvement in macro data, a significant unexpected deviation from expectations could bring significant uncertainty to the Fed's easing cycle and lead to larger-scale market volatility."

According to the Chicago Mercantile Exchange (CME) "FedWatch Tool," during a period where U.S. bond prices fell across the board due to expectations of a rate cut, the probability of the Fed staying put next month surged from 2.6% on Friday to 15.8%. The probability of a standard 25 basis points rate cut decreased from the highest 97.4% to 84.2%, while the voices calling for a 50 basis points cut have almost disappeared. These latest rate cut probabilities compiled by CME indicate that more and more interest rate futures traders are betting on a standard 25 basis points rate cut by the Fed next, with some more aggressive traders betting that strong non-farm payroll data will drive inflation up, prompting the Fed to choose not to cut rates in November or December.

The economist team at Citigroup, a major Wall Street bank, stated in a report on Monday that they expect the Fed to cut rates by 25 basis points in November, rather than the previously anticipated 50 basis points. Following the release of the September non-farm payroll data on Friday, which suggested that the U.S. economy remains strong, Citigroup joined other Wall Street banks in abandoning the aggressive prediction of a 50 basis points rate cut.

In their report, the Citigroup economist team wrote, "The threshold for the Fed not cutting rates in November is quite high, as a month of labor market data has not convincingly reduced the downside risks to the economy, which have persisted for several months, and many data sets have prompted Fed officials to choose a 50 basis points rate cut in September." "We believe that softness in the labor market will reappear in the coming months, and the overall inflation trend will continue to slow down, which may lead Fed officials to choose a 50 basis points rate cut in December."