[CPI Preview] Will the Fed pause rate cuts? What is the outlook for the USA market?

The U.S. Department of LaborOctober 10th (Thursday) evening at 21:30 Japan timeにSeptember's US Consumer Price Index (CPI)will be announced.

Market consensus expectations are for core CPI to increase by 0.2% month-on-month, down from 0.3% in August, and for headline CPI to increase by 0.1% month-on-month, also down from 0.2% in August. For the year-on-year comparison, the market expects headline CPI to rise by 2.3% (compared to the previous month's 2.5% increase).

Core CPI appears to be converging towards 3%.
While the disinflation process is definitely progressing in the market's view,The path to the inflation target of 2% is still unclear..

In order to maintain the inflation target annual rate of 2%, it is necessary for the monthly core inflation rate to stabilize at 0.2% and occasionally remain at 0.1%. However, the recent three consecutive months of fluctuation in monthly core CPI ranging from 0.2% to 0.1% was broken by the record of 0.3% in August, as shown in the chart. Therefore, the inflation rate in August may suggest the beginning of a new inflation or the possibility of inflation settling at a high level.

If the core CPI in September is as expected at 0.2%, the 'excitement' of inflation will be limited to August, strengthening the scenario of disinflation. On the other hand, if the core CPI in September is 0.3% or higher, there may be a potential for 'greater' inflationary pressure.

The Inflation Now from the Cleveland Federal Reserve Bank predicts a 0.27% month-on-month increase in core CPI in September. Furthermore, Inflation Now also predicts a 0.26% month-on-month increase in core CPI for October, which may be rounded up to 0.3%. If the Inflation Now forecast is correct, core CPI may settle around 3% on an annualized basis. In other words, there is a possibility that the inflation rate may settle around the 3% level, rather than fluctuating back and forth towards the 2% target.There is a possibility that the inflation rate may settle around the 3% level, rather than fluctuating back and forth towards the 2% target.Exists.

Did the FRB abandon the 2% target?
Since the FRB relies on data, it actually makes monetary policy decisions based on inflation data from CPI and PCE. Considering the past discussions, the FRB's 2% target could potentially range from 1.7% to 3.1%. Therefore, if core CPI falls below 1.7% or exceeds 3.1%, the FRB may need to be concerned.

The core CPI is currently at the upper limit of 3.1-3.2% with sampling error. Therefore, the current monetary easing by the FRB does not indicate that the FRB has abandoned the 2% inflation target.

However, at the same time, there are upward risks. If the core CPI rises by 0.4% on a month-on-month basis, the FRB will increase vigilance and there is a possibility of changing the policy trajectory. Therefore, investors need to pay attention to the September Consumer Price Index.possibility of changing the policy trajectoryTherefore,Investors need to pay attention to the Consumer Price Index in September.Exists.

Wage increases
In his speech at Jackson Hole, Chairman Powell of the FRB made it clear that the FRB's main concern is the inflation spiral of prices and wages. However, labor market data has shown signs of recovery since July.The labor market in September is very strong, and wages are starting to rise again.The hourly wage growth rate has increased from 3.6% in July to 4% in September, which the FRB will begin to worry about.

The chart below indicates that the trend of monthly hourly wage growth rates from mid-2022 onwards is not showing signs of easing. The latest two months have been at high levels comparable to the peak since the FRB started raising rates in 2022, at 0.5% and 0.4%.

US residential inflation remains persistent
Core CPI rose by 0.3% month-on-month in August, mainly due to a 0.5% increase in US residential inflation compared to the previous month.

The FRB believes that residential inflation based on market rents is declining. However, residential inflation is not decreasing as expected, which will also concern the FRB.

The unexpected increase in residential inflation could push Core CPI up to a "warning level" of 0.4%.Exists.

Impact on the market
At the current point in time, although the core CPI inflation rate statistically falls within the 2% range, it is at the upper limit of that range. Therefore, the risk is biased towards the upside, as wage increases and sticky housing costs may push inflation above this range.

At the same time, when looking at the overall picture, we are in the process of accelerating deglobalization due to intensifying protectionism and geopolitical escalation. Additionally, the looming Israel-Iran war could lead to an oil price shock. In other words,In an environment similar to stagflation in the 1970s.This supports the view that inflation risks are on the rise.

On the other hand, the S&P500 stock price index (SP500) is in a pre-election mode where everything seems perfect, including inflation, and is rising while ignoring geopolitical escalations, interest rate hikes in response to the positive September labor market report, and almost all other negative factors. Therefore,If the core CPI reaches 0.4%, there is a possibility that the September Consumer Price Index could slow down the rise in the stock market.There is a possibility, but considering that there is less than a month until the election, the likelihood is low.