Another CPI release! Financial markets and rate cut expectations face a major test!

Investors and traders are preparing for tonight's CPI inflation data, with all eyes focused on how this data may impact market dynamics. This CPI report could either reinforce or overturn current predictions regarding the Federal Reserve's monetary easing pace, posing a significant test for the economy and financial markets.

Economists predict that overall CPI inflation in the United States for September is expected to rise slightly by 0.1% month-on-month, marking the smallest increase in three months; the year-on-year growth rate of overall CPI is projected to decrease from 2.5% in August to 2.3%, continuing a six-month trend of declining price pressures. If the data released at 8:30 pm tonight meets expectations, it will hit the lowest level since February 2021. However, the core CPI, which excludes food and energy prices, is of greater interest, with a projected 0.2% increase month-on-month and an expected stable year-on-year level of 3.2%.

A larger-than-expected decrease in CPI inflation may strengthen the arguments of Fed doves advocating for more aggressive rate cuts, potentially leading to another 50 basis points cut in November. Conversely, if core CPI data exceeds expectations, it may cause some more hawkish members of the Fed's FOMC to hesitate on further rate cuts next month. Unexpected inflation increase could force investors to further lower their expectations for rate cuts this year, reducing the likelihood of a rapid and substantial rate cut by the Fed.

Given the current macroeconomic environment, inflation has become a focal point, and there is uncertainty surrounding the Fed's next steps. Investors need to adopt a cautious and strategic approach to their portfolios. The volatility of various assets may intensify, depending on the results of tonight's CPI report.

If inflation exceeds expectations, the possibility of the Fed taking a more hawkish stance could lead to market turmoil, especially for growth stocks sensitive to rising interest rates. In this scenario, defensive sectors such as utilities, healthcare, and consumer staples may provide a safer haven. However, if CPI data indicates a cooling of inflation, tech stocks, especially those involved in artificial intelligence and semiconductors, are likely to continue to attract investor attention.

The global research department of Bank of America also stated that, given the improvement in macroeconomic data, the market should be able to withstand the impact of a slight increase in inflation. However, if CPI shows a "significant surprise," it could bring uncertainty to the Fed's rate-cut cycle and introduce greater volatility to the market. The team led by Ohsung Kwon, global equity and quantitative strategist at the bank, wrote: "Following the surge in non-farm payrolls data released last Friday, we believe the importance of this week's CPI has increased."

Meanwhile, the recent rise in the Wall Street "fear index" (VIX) suggests that with the S&P 500 index at historic highs and credit spreads at a two-year low, stock market volatility surrounding CPI "may be greater than before."

In conclusion, Thursday's CPI inflation report is a key event that could either pave the way for further Fed easing or disrupt the current market narrative. Lower-than-expected inflation data may support more aggressive rate cuts, while higher figures could dampen expectations, prompting the market to remain vigilant about the Fed's cautious monetary policy The market may still be sensitive to economic data, so closely monitoring the evolving inflation situation is crucial for successfully allocating investment portfolios and achieving profitability in trading