Data Preview: Is the Fed "Raising Interest Rates with Mouth"? Tonight's Decisive CPI Night is coming!

Finance Associated Press, November 14 (edited by Xiaoxiang) Federal Reserve Chairman Jerome Powell said hawkishly last week that the Fed will not announce the end of its historic interest rate hike until there is more evidence that inflation is cooling. And for now, investors may be looking for more evidence of a pullback in inflation in tonight's US CPI report...

According to the schedule, the U.S. Department of Labor will release the U.S. October CPI data at 21:30 Beijing time, after the previous two consecutive months of CPI year-on-year growth of 3.7%, industry insiders will undoubtedly focus on the latest evolution of U.S. inflation data. The October CPI report comes at a critical time for the market – although the sharp rebound in the stock and bond markets over the past two weeks has been a pleasant surprise, hawkish comments from Fed officials still linger in the ears of investors from time to time, causing many traders to feel anxious.

Judging from the latest bets in the interest rate market, the vast majority of industry insiders now generally believe that the Fed, which can only "raise interest rates with its mouth" and shouting slogans, has come to the "end" of this round of tightening cycle - CME Group's Fed Watch tool shows that the probability of a 25 basis point rate hike by the Fed in January next year is only 26%, and the door to rate cuts is likely to open by the middle of next year.

However, many Fed officials, including Fed Chairman Jerome Powell, are still trying to "add drama" at the end of the current rate hike cycle, which has been locked in by people, and they are not willing to easily admit that the door has been completely closed. The most representative of this is undoubtedly Powell's speech last Thursday, although Powell did not argue for an immediate rate hike, but he pointed out an earlier inflation "feint", that is, the past few times inflationary pressures have weakened, but then rebounded, to the surprise of Fed officials.

Powell said at the time that they would be closely monitoring the state of the economy to avoid the risk of being "misled by months of good data" and the risk of raising interest rates too high.

This series of foreplay and the divergence between the market and the central bank can be said to have attracted the attention and attention of a large number of market traders for tonight's US CPI. So, then again, how exactly will tonight's CPI data perform?

Multi-chart explanation: What is the market's forecast for tonight's CPI data?

According to the median economists surveyed by authoritative media, the year-on-year increase in US CPI in October is expected to fall to 3.3% from 3.7% in the previous month, which will be the first year-on-year decline in US CPI in four months, and on a month-on-month basis, the overall CPI in October is expected to increase slightly by 0.1% from September.

In terms of the Fed's focus on core CPI, the core CPI in October is expected to remain unchanged at 4.1% year-on-year in September and 0.3% month-on-month.

Obviously, from the perspective of market expectations, industry insiders are currently more confident that the overall CPI data in the United States will fall significantly in October, but at the same time, they believe that the core CPI may face certain obstacles if it wants to continue to decline. A relatively bearish background is that the year-on-year increase in the core CPI in the United States has fallen for six consecutive months, and if the year-on-year core CPI data falls to 4.1% as expected, it will break the downward momentum of the previous six months.

Here is the forecast of the major Wall Street investment banks for tonight's US CPI data, listed by Nick Timiraos, a well-known journalist known as the "New Fed News Agency".

The Cleveland Fed's CPI nowcasting model, which has many precedents for accurately predicting CPI data in the past, suggests that the CPI may rise by 3.28% year-on-year and 0.07% month-on-month in October – which is also relatively close to market expectations.

Finally, a small detail to remind investors in terms of CPI estimates is that the actual US CPI for August and September (3.7%) was 0.1 percentage points higher than the market's initial estimate (3.6%). Looking back at the deviation between the actual CPI and the estimate over the past year, it is not difficult to see that the market forecast has gradually changed from an earlier overestimate of the CPI data to an underestimate of the CPI data, which may be worth the extra caution of investors tonight.

If the CPI is to fall in October, what will be the pulls and obstacles?

It is not difficult to foresee that the fall in energy prices may be a big boost to the decline in headline CPI in the United States in October. After the summer consumption boom, energy consumption in the United States is gradually cooling.

According to the U.S. Energy Information Administration, gas station prices across the U.S. fell 12% last week from the year-to-date high recorded in September and are now at their lowest level since March and the lowest for the same period in nearly three years.

National Bank of Canada Wealth Management (NBF) said that "the energy component could have a downside impact on the headline CPI index, which should translate into a modest 0.1% month-on-month increase in CPI." If we judge correctly, the year-on-year CPI increase could fall from 3.7% to a four-month low of 3.3%. ”

Wells Fargo also said that "gasoline prices have been steadily declining since the end of September, and food inflation appears to be moving sideways." These factors underpin our expectation that headline CPI will rise by just 0.1% m/m in October. If realized, it would be the smallest monthly increase since May. ”

In addition to energy prices, another inflation sub-item that fell significantly in October may be used car prices. Data released earlier this week showed that the Mannheim used car price index released by automotive research firm Cox Automotive continued to slide in October and has hit its lowest level since April 2021. The used car price index in Mannheim was only 209.4 in October, down 2.3% from September. The index is also down 4% from the same period last year.

Charles Schwab Chief Investment Strategist Liz Ann Sonders mentioned on social media platform X that the Mannheim Used Car Price Index has now fallen 18% from its peak – the largest drop in the index's history.

Of course, tonight's CPI data has the above-mentioned positive factors that have pushed for a slowdown in price growth, but there are also some negative factors. Changes in the way the U.S. government estimates health insurance costs are expected to slightly lift inflation measures in this area, reversing the trend of some relief in recent months.

It is reported that starting with the October CPI released on Tuesday, the U.S. Bureau of Labor Statistics will make some adjustments to the tabulation of this category. In addition to routine changes to the source data, the new methodology will aim to smooth out some volatility and reduce the time lag of the index.

Canadian Imperial Bank of Commerce said tonight's inflation data is likely to continue to reflect firm price pressures in demand-sensitive categories such as core services other than housing, a tug-of-war between the easing of commodity prices due to supply chain normalisation. In assessing the appropriate level of monetary tightening, the Fed will look for clues about the persistence of these two forces. Housing inflation will also be an important focus on as it surprised in September and has been stronger than expected this year.

It's the CPI "Judgment Day" again, and the financial market is waiting for it

Although the volatility of the US financial market on the day of the CPI release in recent months has been far less pronounced than in the second half of last year, it is undeniable that tonight's CPI report may still be a key catalyst for the US stock and bond markets.

Ahead of Tuesday's October CPI data, U.S. Treasury yields closed little changed on Monday, and U.S. stocks were mixed, reflecting a relatively strong wait-and-see sentiment in the market ahead of tonight's blockbuster data release.

Chris Larkin, managing director of trading at E*Trade, said there was enough high-profile economic data this week to tip the market in either way. Most eyes will be on the latest inflation data, but Wednesday's retail sales data will also help set the tone for the market.

Ahead of the release of the CPI report, a survey conducted by 22V Research showed that most investors do not believe that inflation indicators are on a "Fed-friendly path." Among respondents, 36% believe that the market reaction tonight will be "risk averse", and only 31% believe that the market reaction will show a "rise in risk appetite".

Jim Reid, a strategist at Deutsche Bank, said the highlight of the week will be the US CPI release on Wednesday. The market consensus is that the Fed has largely won on the inflation issue, and one is sure to be very excited about a potential dovish pivot. But this is far from the first time that the hope of a dovish pivot has caused excitement in the market (Deutsche Bank's previous report put it at the seventh), and if core inflation remains above 3% for an extended period of time, there is no doubt that the Fed will seek to tighten policy again. ”

John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, believes that the market may still be "prone to volatility" as many believe that the Fed will remain in "pause" or "skip" mode for longer, but is unlikely to cut interest rates anytime soon.

Regarding tonight's market direction, Lauren Henderson, an economist at Stifel Nicolaus & Co., said, "From what we've seen in the past, the market as a whole is seeing a downward trajectory in inflation and believes that the Fed has finished raising interest rates." If we see a continued decline [in the headline data], the market will reflect it (with an upside). ”

However, Henderson also mentioned that super-core inflation – i.e. core services that do not include housing – will be significant. "The risk is that inflation expectations are likely to continue to rise as inflation remains well above 2%, which could spell further trouble for the Fed. We believe the Fed is close to its peak, but there are still further price pressures in the economy, which will force the Fed to raise rates at least one more time, or keep rates higher than market expectations for longer. ”

FXStreet analyst Yohay Elam said that only a "nasty upside surprise of 0.2% (CPI month-on-month) or more" will the market reassess the outlook for the Fed (which will not raise interest rates again).

"If the data unexpectedly falls, the Wall Street revelry will continue while the dollar takes another hit, and if the data performs as expected overall, a drop in headline inflation could have an immediate positive impact on equities and put pressure on the dollar – even if core CPI remains stubbornly high," Elam added.

(Finance Associated Press Xiaoxiang)