Inflation "devil" resurrected? The most dangerous US CPI night in 14 months has arrived tonight...

Cai Lian News Agency, September 13 (Editor Xiaoxiang) When everyone believes that the Fed has entered the "last mile" of the anti-inflation battle, the inflation "demon" that has scared investors in the past two years seems to be reviving. This has made many people in the industry gradually begin to worry that the Fed's "last mile" from victory may become extremely bumpy...

According to the schedule, the US Bureau of Labor Statistics will release the August CPI report at 20:30 Beijing time tonight, which is also the most critical economic indicator before the Fed's interest rate meeting next week. It can be said that the specific performance of tonight's inflation data is expected to directly affect the Fed's judgment and blueprint design on the future direction of interest rate policy, which has become increasingly internally divided.

However, investors need to be reminded that from the current market expectations alone, tonight's US inflation report for August may create the most dangerous US CPI release night in 14 months. For the US stock and bond markets, which have been under pressure since August, tonight's CPI night is undoubtedly the first test that must be overcome if it is to safely survive the test of the Fed's September interest rate meeting...

Here's our specific outlook for tonight's US August CPI data from multiple angles:

(1) Why is this CPI night quite dangerous tonight?

From the mainstream expectations of the market, people can capture at a glance the biggest risk point of tonight's CPI data - the CPI monthly month-on-month indicator.

According to the median forecast of economists, the year-on-year growth rate of the US CPI in August is expected to accelerate to 3.6% from 3.2% in the previous month; On a month-on-month basis, the headline CPI in August is expected to increase by 0.6% from July, which will be the highest level in 14 months!

(Graphic: The latest forecast of CPI of major investment banks The first and third are month-on-month data, and the second and fourth are year-on-year data)

Many people probably don't know what a 0.6% month-on-month CPI growth rate is. Let's briefly introduce it from two perspectives:

1. The last time the US CPI rose by more than 0.6% month-on-month occurred in June last year, and what was the year-on-year increase in that month? The answer is 9.1%, which is the peak of US inflation.

2. In the context of the Fed entering the "last mile" of the anti-inflation battle, the current CPI month-on-month data is actually more important than the year-on-year data in a sense. And if the 0.6% month-on-month growth rate continues, it is actually tantamount to a "nightmare" for the Fed. The following diagram makes this clear:

If the Fed wants to reduce the CPI to its inflation target of 2% by the middle of next year, it needs to try to keep the month-on-month growth rate within 0.2%. And if the growth rate of 0.6% keeps appearing, then sorry - the Fed has raised interest rates in the past year with a high probability of "dry", and inflation may rise all the way back to 7% in the future.

In fact, tonight's year-on-year and month-on-month CPI gains do not even rule out the possibility of eventually higher than the median market expectation.

The Cleveland Fed's CPI forecast model shows that the CPI may rise by 3.82% year-on-year in August and 0.79% month-on-month - both higher than the market's current mainstream forecast. Win Thin, global head of monetary strategy at Brown Brothers Harriman has warned that the Cleveland Fed's Nowcast model suggests some upside risks to today's CPI data, with persistently high inflation even in September.

(2) Who is the potential "culprit" driving CPI higher?

The culprit behind the high probability of pushing the US CPI higher in August is actually not difficult to find. Because all Americans may have felt it firsthand in the past month — and that is oil prices.

A sharp rise in energy prices is expected to drive most of the CPI's gains. On Tuesday, oil prices hit another year-to-date high, with U.S. WTI closing just below $89 a barrel. Brent crude futures rose above $92 a barrel, the highest level since November 2022.

The rise in crude oil is also directly reflected in the price of refined oil.

The average price of regular gasoline nationwide on Sunday was about $3.82 a gallon, about 60 cents higher than at the beginning of the year, according to energy data and analytics provider OPIS. In addition, the average selling price of regular gasoline at U.S. gas stations hit its highest seasonal level in more than a decade earlier this month, according to the American Automobile Association (AAA), and diesel prices have doubled to the price of crude oil.

AMRO expects a sizable jump in the headline U.S. inflation monthly rate in August, even upside risks relative to the consensus forecast. Higher gasoline prices will be the main upside, while the rebound in airfare and medical costs, as well as higher insurance prices, will also have an impact.

National Bank of Canada Wealth Management also noted that the energy sector could have had a considerable impact on the overall index given the sharp rise in gasoline prices in August. Combined with housing costs, both should lead to a 0.6% month-on-month increase in the US headline CPI in August.

(3) Will there be any unexpected surprises on this "murderous night" tonight?

Seeing this, I believe that many investors will be more pessimistic about the market performance of tonight's CPI night. However, in addition to a series of intuitive bearish factors, tonight's inflation night may not be "completely lifeless". For many bulls in the stock and bond market, a lifesaver they can grasp is the performance of the core CPI data.

From the industry expectations, although the overall CPI data will rebound sharply in August, the core CPI data is expected to fall further. Considering the volatility of energy and food prices, the cooling of the core CPI may ease the pressure on the Fed to some extent.

Institutional surveys now show that the year-on-year increase in the core CPI in August is expected to fall to 4.3% from 4.7% in the previous month, and the core CPI will remain at 0.2% month-on-month. Among the core CPI, used car prices are expected to fall further in August, following a 0.5% month-on-month decline in June and a 1.3% month-on-month decline in July. Prices of other core commodities, including household goods, entertainment, education and communications, are also expected to decline further.

Deutsche Bank said the positive news in the core data could partially offset the negative for the strong headline inflation data. The bank expects core CPI inflation to fall to 4.3% y/y and headline inflation to rise to 3.7% y/y. As core inflation remains relatively subdued, the positive momentum should continue, with three-month annualized inflation falling by about 90 basis points to 2.2%, and six-month annualized inflation falling by 50 basis points to 3.6%, both of which would be the lowest since the beginning of 2021.

Canadian Imperial Bank of Commerce expects the core CPI to be just 0.1% m/m in August, as loose supply chains further weigh on core commodity prices. It expects service prices to remain firm given strong demand, but remain stable in recent months. A favorable base effect would also help push core inflation sharply down to 4.2% y/y. The headline CPI will rise to 3.5% y/y due to higher gasoline prices. Given the Fed's data-dependent stance and will continue to make significant trade-offs in risk management considerations, a downside surprise should slightly benefit the fixed income market.

(4) How will the August CPI data affect the Fed's decision-making?

Fed officials have repeatedly stressed that they remain highly concerned about the upside risks to inflation and may need to keep rates high even if they stop raising rates in the future.

Therefore, the specific performance of tonight's CPI data, although unlikely to change the market's expectation that the Fed's decision will not move next week, is likely to influence people's judgment on whether the Fed will raise interest rates in November or December.

CME Group's Fed Watch tool shows a 93.0% chance that the Fed will leave interest rates unchanged next week. However, the outlook for interest rates in November is relatively uncertain – the industry expects a 59.2% chance that the Fed will remain on hold and a 40.8% chance of a rate hike.

Leslie Falconio, head of fixed income strategy at UBS Global Wealth Management, said, "The latest CPI data may shed more light on the Fed's potential policy path. We don't expect the Fed to act in September. Even for now, we don't think they will act in November, but the probability of a rate hike by then is really equivalent to a five-fifty percent. ”

(5) How will global financial markets react tonight?

As the most important US economic indicator in the past year or so, it is already a common thing for people to experience short-term sharp fluctuations in global financial markets after the release of the US CPI, and traders in all stock and bond markets will obviously be waiting for it tonight.

Tom Essaye, a former Merrill Lynch trader who founded the US market research publication "7 Points Market Report", said that the CPI is really critical tonight, because if it stops the downtrend, the market will have to price in the more hawkish Fed, which will bring headwinds to the stock market.

Essaye noted, "In a more familiar way, CPI affects two of the three pillars of the stock market rally: disinflationary trends and Fed rate hike expectations." If the CPI overheats, both pillars will be damaged. ”

Interestingly, when we look back at the trend of US stocks and the US dollar on the CPI release date over the past few months, it is not difficult to see that the strength of the two is quite clear.

In the past ten US CPI release days, US stocks have risen 9 times throughout the day;

The dollar is the opposite. In the first 30 minutes of the past ten US CPI releases, the dollar index has been hit nine times and fell.

But will there be a rise in U.S. stocks and a fall in the dollar again tonight? Not necessarily. Ultimately, it will depend on whether tonight's actual data performance is lower than market expectations. Because this is the only "exception" where U.S. stocks fell and the dollar rose, and it was also the only time that the actual CPI rose significantly more year-on-year than expected (January CPI).

Morgan Stanley, a well-known Wall Street investment bank, once again predicted the possible trend of the S&P 500 index on Tuesday on different scenarios for tonight's CPI data. Their judgment is based on the market's consensus expectation of a 0.55% month-on-month increase in August CPI (rounded up to 0.6%):

Scenario (1): CPI rises 0.5% month-on-month

Damo puts the probability of this scenario at 45%. This figure is 5 basis points below consensus expectations and could eventually increase the S&P 500 by 0.25%-0.75%.

Scenario (2): CPI increases between 0.55% and 0.7% month-on-month

Damo puts the probability of this scenario at 27.5%. In this scenario, the S&P 500 could fall by 1%-1.5%.

Scenario (3): CPI increases between 0.3% and 0.45% month-on-month

Damo puts the probability of this scenario at 20%. In this scenario, the S&P 500 could rise by 1.25%-1.75%.

Scenario (4): CPI rises by 0.7% or more

Damo believes that the probability of this scenario occurring is 5%. In this scenario, the S&P 500 could plunge 2%-2.5%.

Scenario (5): CPI rises less than 0.3% month-on-month

Damo puts the probability of this scenario at 2.5%. In this scenario, the S&P 500 could jump 2%-3%.

This article originated from Cai Lian News Agency Xiaoxiang