[REPOST] PREVIEW - US CPI data will be released at 13:30BST/08:30EDT

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  EXPECTATIONS: The consensus looks for US consumer prices to rise +0.2% M/M in August (prev. +0.2%), with the annual rate expected to ease to 2.6% Y/Y from 2.9%; the core rate of CPI is expected to also rise +0.2% M/M (prev. +0.2%), with the rate of annual core CPI expected to remain unchanged at 3.2% Y/Y.


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  DRIVING THE DATA: Goldman Sachs said this month’s report is expected to show a continued rise in car insurance prices, though at a slower rate, while shelter inflation should moderate, with owners’ equivalent rent up by 0.33% and primary rent by 0.29%. Ahead, Goldman sees monthly core CPI inflation is at around 0.2% M/M for the rest of the year, with annual core CPI inflation forecasted at 2.9% Y/Y and core PCE inflation (the Fed’s preferred measure) at 2.6% Y/Y by December 2024. GS says disinflation is anticipated in the auto, housing rental, and labour markets, balanced by potential increases in healthcare and car insurance costs.


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  POLICY IMPLICATIONS: August's labour market data itself did not offer any explicit clarity on whether the Fed would be more inclined to begin its rate cutting cycle with a 25bps reduction, or a larger 50bps move at its September 18th meeting. The headline came in beneath expectations at 142k (vs an expected 160k), though the jobless rate declined to 4.2% from 4.3%; that said, the underemployment rate rose to 7.9% from 7.8%, and average hourly earnings rose +0.4% M/M (exp. +0.3%), pushing the annual rate up to 3.8% Y/Y from 3.6%. Citi says Inflation data are quickly taking a backseat to labour market data in terms of relevance for Fed policy decisions, but with an inconclusive August employment report, the August CPI data could be impactful for the probability of a 25bps or 50bps rate cut. “A downside surprise to CPI could further raise market-implied probabilities for a 50bps cut in September, but a benign reading as we expect would have markets and Fed officials looking to activity data like initial jobless claims and retail sales for guidance on the appropriate size of the first cut,” the bank writes.


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  FED TRAJECTORY: Money markets are currently pricing around a 65% chance that the Fed will cut rates by 25bps in September, with around 35% probability of an upsized move. Through the end of the year, markets are pricing around 115bps of rate reductions (implying four fully priced 25bps rate reductions, with a decent chance of a fifth).


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  BULL/BEAR SCENARIOS: JPMorgan says that the Bull Case is if we see a reading of 0.1% M/M or lower, which would push the Fed towards 50bps while growth holds up, though it warns that a cooler print like this may be seen as evidence that the economy is declining more rapidly than expected. JPM's Bear Case is an outlier print that sparks a recessionary or stagflationary narrative, which JPM says could mean a headline of less than 2% Y/Y or above 4% Y/Y. JPM writes that "given the fragility of the market, there is a Goldilocks level here where ideally we would see CPI print inline, or +/- 0.1% of consensus with earnings increasing." JPM says that lost in the analysis of the labour market is the fact consumers are still spending.


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  MARKET REACTION SCENARIOS: Goldman Sachs says "that a soft print close to expectations is likely the best outcome: it will allow some event risk to pass and equity vol to settle slightly lower very near - term," adding that "scenarios where the data is deemed too hot or too cold could introduce more uncertainty around the Fed’s path, or the current level of US growth." Scenarios are:


• Core CPI beneath 0.15% M/M: SPX -0.2%


• Core CPI between 0.15-0.19% M/M: SPX +1.2%


• Core CPI between 0.20-0.25% M/M: SPX +/- 0.5%


• Core CPI between 0.26-0.30% M/M: SPX -0.75%


• Core CPI between 0.31-0.34% M/M: SPX -1.5%


• Core CPI above 0.35% M/M: SPX -2.25%

11 Sep 2024 - 13:07- Fixed IncomeData- Source: Newsquawk