September CPI Could Be a Game Changer for 25 bps Cut Next Meeting, but Traders Expect More Turbulence Ahead
The September CPI is set to release on Thursday, and investors are already eager for it. Following stronger-than-expected nonfarm payrolls, traders have scaled back their bets on rate cuts for the Fed's last two meetings of the year. However, as the last CPI report before the Fed's November meeting, it could be a game changer, as the Fed seeks greater balance between labor market and persistent inflation.
Here's what to expect:
Overall CPI: 0.1% m/m, down from August's 0.2%, translating to 2.3% y/y
Core CPI: 0.2% m/m, down from the previous 0.3%; but remains steady at 3.2% y/y
Investors expect further slowing inflation from August. Traders see an 87% chance of a 25 bps cut in the November meeting, with only a 13% chance of no move, according to CME FedWatch.
Shelter costs, which make up over one-third of the overall CPI, will be a focal point in the report. In August, shelter costs unexpectedly rose by 0.5% month-over-month, faster than the previous month's 0.4%. This increase highlighted strong demand for rent, contributing to inflationary pressures.
However, there is a silver lining. According to Zumper's national rent report, national rents showed a slight decline in September. The median rent for a one-bedroom fell by 0.1% to $1,533, while two-bedroom rents decreased by 0.2% to $1,912.
September signaled a cooling off in the hot moving season as national one and two-bedroom rents both decreased on a monthly basis—a trend which we have not seen in the last five months, explained Zumper CEO Anthemos Georgiades, As we transition into fall, this shift in the rental market aligns with the typical seasonal patterns we have finally returned to after the last few years of unconventional fluctuations.
But still, the overall economy remains strong, as evidenced by the solid September nonfarm payrolls report. Nonfarm payrolls surged by 254,000 for the month, up from a revised 159,000 in August and significantly better than the 150,000 consensus forecast. The unemployment rate fell to 4.1%, down 0.1 percentage points.
Inflation could become a market-driving fear again this week when the September data is released, says Bank of America. The bank noted that the market-implied move for stocks around Thursday's CPI is now above 1%, compared to a realized move of 0.7% over the prior three months.
After the blowout jobs report, CPI is no longer a 'non-event.' Stocks should be able to withstand a slight upside surprise in inflation, but a sizeable surprise would bring more volatility, the Bank of America note said.