October US CPI

On Thursday the Bureau of Labor Statistics will release September’s consumer price index. A CPI reading is expected to dictate how much more aggressive the Federal Reserve will get with its interest rate hiking plans, which are already the most combative in decades. The consequential economic release will hold even greater significance after the Labor Department’s September jobs report on Friday suggested officials have further room for increases.


CPI is forecast to have risen 8.1% in September from a year earlier versus 8.3% in August, according to economists surveyed by Bloomberg. Core CPI, which strips out volatile food and energy components, is projected to rise 6.5% on a year-over-year basis and fall to 0.4% month over month.


The annual inflation rate in the US eased for a second straight month to 8.3% in August of 2022, the lowest in 4 months, from 8.5% in July but above market forecasts of 8.1%.

Annual and monthly gains in the Consumer Price Index (CPI) have eased from their peaks, suggesting at the very least the inflation rate is no longer rising at the brisk pace of this summer. While that bodes well for consumers and investors, it doesn't provide much clarity about when (or by how much) the Fed might adjust its aggressive campaign of interest rate increases. Inflation is still above the Fed's 2% goal, while nominal income growth and demand for labor remain strong.


Fed officials until now show little sign they are in a mood to pause the rate-hiking cycle despite the potential hit to economic growth. The Fed will need to see multiple inflation reports before they are certain they have it under control while forward-looking markets will anticipate the outcome. The only answer markets want to know is what will the inflation number be a year from now.


Nonfarm payrolls increased 263,000 in September the smallest monthly advance since April 2021 after a 315,000 gain in August, a Labor Department report showed Friday. The unemployment rate unexpectedly dropped to 3.5%, matching a five-decade low. The jobs report showed average hourly earnings were up 0.3% from August and up 5% from a year earlier, a slight deceleration from the prior month but still historically elevated. The solid increase suggests the Fed will have to continue to raise interest rates as it aims to rein in rapid wage growth that has bolstered household spending.


“The jobs number points to another hike of 75 basis points next month, the labor market looks solid and it’s tough to see a chink in the armor of economic data at the moment,” said Kevin Flanagan, head of fixed-income strategy at Wisdom Tree. Payrolls today did not betray any signs of weakness, coming in ahead of expectations, but the path is clear: payrolls growth is set to drop sharply in the coming months and soon contract.


Federal Reserve officials forecast that rates would reach 4.4% by the end of this year and 4.6% in 2023, implying a fourth-straight 75 basis-point hike could be on the table for their next meeting in November to combat the fastest inflation in decades. The futures markets are currently pricing in that the Fed’s key rate will peak in a range of 4.5%-4.75% in March. Scott Minerd, global chief investment officer at Guggenheim Investments, said severe strains in financial markets are likely to be the key to when the Fed finally reverses course.


Goldman Sachs Group Inc. analysts say it’s “too early” to price in a dovish turn in Federal Reserve policy as the economic outlook isn’t bad enough yet, and rates markets remain too volatile.


The US equity benchmark is only a few points away from closing at its lowest since November 2020 for the second time in less than two weeks. Treasury two-year yields climbed as much as four basis points Tuesday to 4.35%, the highest level since 2007, amid concern US inflation data this week will add to the reasons for the Fed to keep raising interest rates.


 The tightening of financial conditions, a potential escalation of geopolitical risks, and the current mix of growth and inflation have kept the risk of declines higher for equities




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