Markets are on edge as investors anticipate the latest U.S. inflation data, a report that is expected to show continued moderation in consumer prices. U.S. Treasuries dipped, while the dollar recorded its longest winning streak, reflecting growing uncertainty about the Federal Reserve’s future policy direction. Despite some market movement, investor sentiment remained largely unchanged following the release of minutes from the latest Federal Reserve meeting. Those minutes revealed that Federal Reserve Chair Jerome Powell faced internal resistance to a half-point rate cut in September, with some policymakers advocating for a more modest reduction.
According to the minutes from the Federal Open Market Committee (FOMC), policymakers broadly agree that inflationary pressures are easing, though concerns about weakening job growth persist. These factors keep the door open for future rate cuts, if economic conditions warrant them. As 2024 approaches, it’s clear that Powell may take a more accommodative stance to support markets, should conditions deteriorate.
U.S. inflation is expected to have cooled further by the end of the third quarter, providing reassurance to a Fed increasingly focused on protecting the labor market. The Consumer Price Index (CPI) for September is projected to rise by just 0.1%, the smallest increase in three months. On an annual basis, the CPI likely rose 2.3%, marking its sixth consecutive month of deceleration and the lowest year-over-year inflation rate since early 2021. Core CPI, which excludes volatile food and energy prices and is a better indicator of underlying inflation, is forecast to increase by 0.2% month-over-month and 3.2% compared to September 2023.
The Federal Reserve’s strategic pivot from focusing primarily on inflation to giving greater consideration to the health of the labor market signals that future inflation data such as the CPI may carry less weight in determining monetary policy. However, market participants are still bracing for volatility from this month’s inflation report, especially in light of last week’s robust jobs numbers, which suggest potential upside risks to inflation remain.
According to a survey of market participants, 42% of investors expect the CPI data to elicit a “mixed or negligible” response in markets, while 32% foresee a “risk-off” reaction, with only 25% anticipating a “risk-on” rally. The balance of expectations highlights a cautious market, as traders grapple with an uncertain economic landscape, shifting Fed priorities, and the lingering specter of inflation.
As traders digest these economic signals, the outcome of the CPI report could serve as a crucial indicator for the direction of monetary policy heading into the year’s end, with potential implications for both Treasury yields and the broader currency markets.