The USA non-farm night last Friday made the 25 basis points rate cut expectation by the Federal Reserve this month the mainstream in the current market. Will this rate cut expectation imbalance continue all the way to the Fed's interest rate decision day next week, tonight may be the last 'decisive moment'...

According to the schedule, the US Bureau of Labor Statistics will release the August CPI report at 8:30 pm Beijing time tonight.

Although now, in terms of macro factors determining the US interest rate path, the influence of inflation data has gradually receded behind non-farm data, but tonight, there may still be no Wall Street traders who dare to easily shift their focus elsewhere.

This CPI report released in the week before the Fed interest rate decision day, while not powerful enough to help people lock in the expectation of a 50 basis point rate cut by the Fed this month, if the data can further fall below expectations, it should at least retain the hope of a 50 basis point rate cut. On the other hand, if the data unexpectedly exceeds expectations, then the prospect of a 50 basis point rate cut this month is almost shattered prematurely, and people can already prepare for a 25 basis point rate cut!

So, how will tonight's CPI data perform?

US August CPI Data Expectations Overview

Let's take a look at Wall Street's expectations for tonight's CPI data:

After July CPI returned to the "2 era", economists from institutions surveyed by the media currently expect that the year-on-year inflation rate of US CPI in August is expected to further fall back to 2.6% (July was 2.9%), and the month-on-month rate is expected to rise by 0.2% (the same as July's +0.2%).

Excluding the volatile prices of energy and food, the core CPI in July is expected to rise by 3.2% year-on-year and 0.2% month-on-month, both consistent with the previous month.

The following chart is a summary of the estimates by major investment banks as reported by "The New Fed Wire" Nick Timiraos:

It is not difficult to see that industry institutions are relatively optimistic about the downward trend of the year-on-year inflation rate of CPI in August—mainstream estimates range from 2.5% to 2.6%, a sharp decrease of 0.3-0.4 percentage points compared to the previous month, which is a relatively significant decline in absolute value changes over the months.

As for the more important month-on-month forecast of core CPI, the industry's predictions for this data are very symmetrical this time. In Bloomberg's survey, five analysts predicted a 0.3% increase in core CPI, four analysts predicted a 0.1% increase, and the rest predicted a 0.2% increase.

The four institutions that predict the highest increase in core CPI (+0.3%) are BNP Paribas, Pantheon, Wells Fargo & Co, and Natixis; on the other hand, the four institutions that predict a increase of only 0.1% in core CPI are Royal Bank of Canada, TD Securities, Desjardins, and Helaba.

Where will the trend of falling inflation be reflected?

In terms of specific CPI sub-items, the continued decline in oil prices in August will undoubtedly continue to contribute significantly to the overall CPI cooling in the United States. Influenced by recession fears and demand concerns, international oil prices fell by more than 5% last month, and gasoline prices in the United States also fell significantly. It can be foreseen that the positive effect of this area's inflation cooling may even continue until September—Brent crude oil prices fell below $70 per barrel on Tuesday.

In other areas of prices that are most watched, it is generally expected within the industry that the rental inflation rate will also decrease in August after rebounding in July. This will bring the rental inflation back to the long-anticipated downward trend that started in June. As housing accounts for the largest share of CPI, the slowdown in rental growth will provide some room for other service categories (such as medical care and airfares) to rebound slightly after an exceptional decline in July, without exerting too much impact on overall inflation.

"We believe that the Bureau of Labor Statistics' All Tenants Returning Rent Index (ATRR) is the most reliable leading indicator, which indicates a decline in official rental inflation," said Nomura Securities economists Aichi Amemiya and others in their preview of the data on September 5th." In addition, the supply of rental apartments is still high, so the potential trend of rental inflation is unlikely to accelerate again in the near future."

In the past two years, the rise in auto insurance prices has been an important reason for the rise in service industry prices. However, there are signs now that insurance companies may start to slow down their price increases in the coming months.

"The premium applications in July seem to have started to slow down, indicating that the extent to which insurance companies submit premium increases to regulatory authorities will not be that great. We expect this trend to continue, and the increase in auto insurance rates for the remaining time of the year will show a more significant deceleration," said Diego Anzoategui, economist at Morgan Stanley, in a preview of the report on September 5th.

In terms of core commodities, the prices of core commodities fell by 0.3% month-on-month in July, marking the 13th consecutive month of decline in the past 14 months, with the most significant decline in used car prices. Currently, analysts generally expect more moderate declines in overall core commodity prices and used car prices in August.

Another category worth noting in the basket of core commodities is clothing, with the largest decline in prices for this category since the beginning of the year in July. Currently, analysts have different opinions on whether prices will fall again in August, which means that any significant fluctuation could have a significant impact on the overall inflation reading compared to expectations. Skanda Amarnath, Executive Director of Employ America, predicted in a report on September 10th that seasonal adjustment factors may pose downside risks to clothing prices in the August report, especially after pushing up clothing prices at the beginning of the year.

Currently, Goldman Sachs expects the core CPI in the US to rise by 0.23% in August (the market generally expects a rise of 0.2%), and to rise by 3.17% year-on-year (the market generally expects a rise of 3.2%). The following chart shows Goldman Sachs' specific outlook for various sub-items of the core CPI:

How will tonight's CPI data affect the Federal Reserve?

According to the Chicago Mercantile Exchange's FedWatch tool, traders in the interest rate futures market currently predict a 65% probability of a 25 basis point rate cut at the Fed's upcoming policy meeting next week, and a 35% probability of a 50 basis point rate cut.

Therefore, the role that tonight's CPI data can play is quite clear: if the data is higher than expected, it will help to solidify the mainstream expectation of a 25 basis point rate cut next week; if the data is lower than expected, it will further ignite the "uncertainty" within the industry about whether the rate cut next week will be 25 or 50 basis points.

Federal Reserve Chairman Powell stated at the global central bank symposium in Jackson Hole, Wyoming last month that the time for policy adjustment has come. The biggest question now is how big of a step the Fed will take with its first rate cut.

Citigroup economists Veronica Clark and Andrew Hollenhorst pointed out in their CPI preview report released on September 9th that, although inflation data is rapidly giving way to labor market data in terms of relevance to Fed policy decisions, the August employment report is inconclusive, therefore August CPI data could still have an impact.

"Given the increasing downside risks to the labor market and economic activity, the weak CPI data suggests that the threshold for a larger rate cut is likely low," said Citigroup economists.

In a report to clients last Friday, a team of Wells Fargo economists led by Jay Bryson wrote, "Another benign CPI report could give FOMC members enough 'confidence' to believe that inflation is sustainably returning to 2%, thereby supporting a 50 basis point rate cut. On the other hand, if inflation data exceeds expectations, a 25 basis point rate cut at the September meeting is likely to become the consensus."

In terms of market impact, analysts at Mitsubishi UFJ Financial Group stated that the data is consistent with a slowdown in inflation and is crucial to support the current expectation of a Fed rate cut. Strong CPI data for August will not prevent the Fed from cutting rates next week, but such a result will further question the aggressive easing bets already reflected in prices, which in turn could bring upward pressure on the dollar.

Goldman Sachs has listed the potential volatility of the S&P 500 index under different core CPI monthly growth rates for tonight's movement in the U.S. stock market.

It is worth mentioning that, unlike usual, this time Goldman Sachs believes that the further the data deviates from the market's expected value (either too high or too low), the more unfavorable it will be for the performance of the US stocks. In the past, similar predictions by Goldman Sachs often favored lower data.

Regarding this, the Goldman Sachs team explained that weak data close to expectations could be the best outcome: it would make the risks of certain events a thing of the past and slightly lower the stock volatility in the short term. However, if the data is considered too hot or too cold, it could bring more uncertainty to the Fed's interest rate path or the current direction of the US economy.

Editor/ping