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US Sept CPI and Fed Response

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Thursday is likely to have the pivotal data in terms of the markets, particularly in relation to the dollar. If everything goes as expected, it would probably simply reaffirm the current trajectory. But if there is a miss of expectations, there might be some major changes that could have impacts across the markets.

The week started with a couple of dire warnings from the heads of JPMorgan and Morgan Stanley. Both doubled down on the expectations that a recession was imminent. This is especially relevant as both major US banks will be reporting at the end of the week, marking the unofficial start of what’s expected to be a downbeat earnings season. Risk sentiment, naturally, has been under pressure.

What could change things

There are a lot of expectations about when the Fed will “pivot” (that is, stop raising rates so aggressively and turn towards at least a more neutral stance). The Fed argues that interest rates will remain high, while many in the market are expecting interest rates to come down. When that might happen is still a matter of debate, with the Fed trying to convince markets that it’s still relatively far off.

Tomorrow’s release of the minutes from the last Fed meeting could give some insight, with analysts very keen to see if there is any talk of easing off on the rate hikes. That could provide some relief to the stock market and dent the dollar a little bit.

Getting the data in order

As it stands, over 80% of economists believe the Fed will raise rates by another 75bps at their next meeting. That consensus got stronger after the unexpected drop in the unemployment rate for last month, suggesting that the Fed had plenty of room to act, at least from the jobs side. With the Fed laser focused on inflation, the only thing likely to give some pause in the expectations is if core inflation comes in not only below expectations, but below the prior reading.

For the last couple of months, the US has been experiencing a phenomenon where headline inflation has been coming down, while core inflation has been rising. The main explanation for the reduction in inflation are falling energy prices. But, after the OPEC+ agreement and subsequent rebound in crude prices, that trend might reverse itself through October

What to look out for

Headline inflation is forecast to drop to 8.1% from 8.3% prior. Falling inflation could help support the dollar, as it would imply real interest rates are increasing. Core CPI change, on the other hand, is expected to rise to 6.5% from 6.3%.

The Fed cares more about the core CPI rate, and if that keeps rising, then the Fed is most likely to keep tightening. A miss on expectations for core CPI could increase bets for a 50bps hike, instead of the 75bps that seems most likely at this point.

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