U.S. September CPI Data Set to Be Released, Market Expects Three Scenarios

Recently, the US stock market has experienced significant fluctuations due to inflation data. Minor changes in the core consumer price index (CPI) month-on-month data can have a substantial impact on the market. The US CPI data for September, which is set to be released this Thursday, may trigger market fluctuations once again.

Reasons for the Attention on CPI

Currently, the Federal Reserve is striving to stabilize prices, even at the cost of the labor market to reduce inflation, which underscores the importance of each inflation data point.

CPI, as a measure of actual inflation, is the main reference for observing price increases. Although the Personal Consumption Expenditures Index (PCE) is the preferred inflation indicator of the Federal Reserve, due to its later announcement, CPI has effectively become the preferred indicator for assessing price levels.

In the composition of the CPI, core CPI is given more importance than overall inflation data. Although global politicians are quite concerned about changes in fuel prices, the market and the Federal Reserve are more focused on potential inflation data. Since the Federal Reserve started raising interest rates in March of this year, the month-on-month changes in CPI have received more attention than year-on-year changes.

The comparison chart of the Euro/USD fluctuations since 2021 clearly shows the impact of inflation on the market.

Three Predicted Scenarios for September CPI

1. Meets expectations

If the core CPI rises by 0.5% or 0.4% month-on-month, it meets market expectations. This may indicate that the price increases and the Federal Reserve's rate hike cycle is nearing its end. However, even with a month-on-month growth of 0.4%, the year-on-year increase still reaches 5%, indicating that inflation remains at a high level.

The market may take a breather first, and dollar bulls may choose to take profits. However, after the initial reaction, investors may reassess the inflation data. Federal Reserve officials may reiterate their stance that the current level of inflation is too high and that further rate hikes are necessary.

Therefore, after the CPI is released, there may be new opportunities to buy dollars, and the Federal Reserve is very likely to raise interest rates by 75 basis points again in November.

2. Below expectations

If the core CPI month-on-month increase is 0.3% or lower, it may trigger a significant rise in US stocks and a sharp decline in the dollar. In this case, the 0.6% increase in August may be regarded as a one-off phenomenon. The bond market may digest the expectation that the Federal Reserve will only raise interest rates by 50 basis points in November.

However, given the impact of supply chain constraints and rising interest rates on mortgages, the likelihood of core CPI data being below expectations is moderate.

3. Exceeds expectations

If the core CPI month-on-month increase reaches 0.6% or higher again, it indicates that the low increase of 0.3% in July was an exception. The market may once again predict an interest rate hike of around 100 basis points in November.

If the core CPI rises by 0.7%, it could trigger large-scale dollar buying and a decline in US stocks. Although analysts believe the likelihood of this scenario is low, it cannot be completely ruled out due to the high potential risks.

Conclusion

Considering the market's muted reaction to last week's non-farm payroll data, and the significant volatility triggered by the previous two CPI data releases, the September CPI data to be released this Thursday will undoubtedly attract considerable attention, and its impact should not be underestimated.