Last week was all about non-farm payrolls, will core CPI be even hotter this week?

The U.S. September non-farm payroll data greatly exceeded expectations, paving the way for an economic "soft landing". The next key question is whether inflation will make a comeback.

This Thursday, the U.S. September CPI data will be released, which will be important data that may disrupt U.S. stocks and interest rate cut expectations. Currently, the media generally predicts that the overall CPI for September will increase by 0.1% month-on-month, with the core CPI expected to increase by 0.2% month-on-month. On a year-on-year basis, the overall CPI is expected to decrease from 2.5% in August to 2.3%, while the core CPI is expected to remain stable, increasing by 3.2% year-on-year.

It is worth mentioning that UBS believes that inflation is heating up even more. It forecasts a 0.31% month-on-month increase in core CPI for September, with a year-on-year increase reaching 3.3%. UBS stated that this may serve as a wake-up call for the Federal Reserve's FOMC - the U.S. has not yet escaped the troubles of inflation.

Goldman Sachs' forecast is also higher than the market's general expectations, with core CPI expected to grow by 0.28%. Goldman Sachs also predicts a 0.23% growth in core CPI services for September, higher than the average growth level of the previous three months by 0.13%.

Some analysts believe that a higher-than-expected September CPI report and the possibility of inflation making a comeback in the coming months will further limit the Federal Reserve's pace of interest rate cuts. More importantly, this will also hinder the rise of U.S. stocks.

The strong non-farm payroll report last week may have paved the way for the economy to achieve a "soft landing" in the face of declining inflation. However, it has also forced investors to reduce their bets on a Federal Reserve interest rate cut, while also raising doubts about whether the Federal Reserve's 50 basis point rate cut last month was a mistake.

Is the road to declining inflation not smooth sailing?

Goldman Sachs pointed out in its latest report that car insurance prices will rise again, reflecting a continuous growth in premiums despite a slowdown in the growth rate. Secondly, after a significant increase in recent months, it is expected that housing inflation will slow down, with homeowner equivalent rent rising by 0.35% and primary rent rising by 0.31%.

However, Nancy Tengler, CEO of Laffer Tengler, stated that housing costs have been one of the most persistent drivers of inflation this year and are still at high levels. In addition, the tension in the Middle East has led to an increase in energy costs, and last week's dockworker strike has raised concerns about a resurgence of inflation this year. Some analysts believe:

The rise in energy costs and the potential consequences of the three-day port strike may only cause "short-term disruptions" to the deflation trend and "short-term" push up the CPI, without leading to "sustained inflation" in the U.S. economy.

Furthermore, looking at the September non-farm payroll report, wage inflation remains high. Steve Wyett, Chief Investment Strategist at BOK Financial, stated that average hourly wages increased by 0.4% month-on-month in the September employment report, exceeding expectations, along with the "eye-popping" dockworker wage agreement. This still reminds investors that inflation remains an issue for the Federal Reserve. Compared to the size of the workforce, the number of dockworkers is not enough to have a direct impact on overall wage levels, but progress towards achieving the Federal Reserve's 2% target may still be slow.

Regarding the impact on U.S. stocks, Mike Reynolds, Deputy Chief Investment Officer of Glenmede Trust, stated:

This may be the "last clean inflation data" before facing some "contrary" trends in the coming months. If the CPI data starts moving in the wrong direction, it will have a serious impact on the stock market and the economy, and in extreme cases, the Federal Reserve may start raising interest rates again... This is certainly not the base case, but as a tail risk for the stock market, it is something to watch out for.

Is the Federal Reserve's Rate Cut Too Aggressive?

Looking at the latest economic data, September's non-farm payrolls exceeded expectations by a large margin, while core CPI may rebound. Did the Federal Reserve go too far with a 50 basis point rate cut last month?

According to Tengler:

The risk the market faces is that the Federal Reserve's rate cut is too aggressive because inflation has not been contained. Every month, we see the core CPI showing the same mild upward trend, which is not the deflation we want to see in the entire economy.

UBS believes that although the minutes of the latest Federal Reserve meeting may show that participants generally agreed on the decision to cut rates by 50 basis points, this may mask more hesitancy. The minutes may also indicate that participants do not want to see the 50 basis point rate cut as a new pace of rate cuts.

In addition, there will be a lot of speeches by Federal Reserve officials to digest this week, including speeches by Fed Governors Kugler and Bowman, as well as many regional Federal Reserve Bank presidents speaking, and Vice Chairman Jefferson will comment on the history of the discount window