Before last week's non-farm payroll data were released, no one would have anticipated that tonight's inflation data would be so crucial. This is because it will provide clues for the Federal Reserve's final two interest rate decisions this year and verify whether last month's aggressive rate cut was a big mistake.

Originally, the market optimistically believed that inflation had been defeated when the Fed initiated the easing cycle last month, and it was expected that there would be at least two rate cuts by the end of the year. As a result, people were generally more tolerant of slightly higher CPI data and excited about CPI that was lower than expected.

However, the U.S. non-farm employment report released last Friday shattered this optimistic expectation. The number of new jobs added far exceeded expectations, the unemployment rate unexpectedly dropped to 4.1%, and the year-over-year wage increase rose. People began to worry about an overheating economy, and former U.S. Treasury Secretary Summers even called on the Fed, saying that "a 50 basis point rate cut in September was a mistake."

Now, the CPI data needs to be weaker than before to alleviate the market's concerns; higher-than-expected inflation could reverse the current "Goldilocks" narrative and have a greater negative impact on the market.

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The market expects CPI to continue cooling in September

Tonight, the market's attention is focused on this significant inflation data. If inflation picks up, the market worries that the Fed may pause rate cuts in November.

Currently, the market's expectation for September CPI data is:

CPI increases by 0.1% month-on-month, lower than the previous month's 0.2%;Core CPI decreased on a month-on-month basis to 0.2%, which is also lower than the previous 0.3%;

On an annual basis, CPI decreased from a year-on-year increase of 2.5% to 2.3%, marking the lowest increase since early 2021;

Core CPI is expected to remain unchanged for the third consecutive month, with a year-on-year increase of 3.2%.

Forecasts indicate that airfare prices will decrease by an average of 3.4%, and used car prices will decrease by an average of 1.1%. Thanks to these two factors, inflationary pressures in September will be reduced.

Housing inflation is also expected to ease, with owner-equivalent rent expected to rise by 0.35% and primary rent by 0.31%, compared to the significant increases in July and August.

It should be noted that in recent months, core CPI has been stubborn due to soaring car insurance prices. If this trend continues, the stickiness of core CPI may further intensify. Goldman Sachs expects car insurance prices to rise again by 0.7% in September.

In addition, rising energy costs due to tensions in the Middle East, as well as last week's strike by dockworkers along the U.S. East Coast and the Gulf Coast, could lead to a resurgence of inflation.

Looking ahead, Goldman Sachs expects the monthly core CPI inflation rate for the rest of this year to be around 0.20-0.25%. In 2024, the rebalancing of the automotive, rental housing, and labor markets will further reduce inflation rates, but the catch-up inflation in healthcare and car insurance will offset the impact of inflation.

Earlier this week, Powell spoke, expressing increasing confidence in the return of inflation to the 2% target, and believed that a 50 basis point rate cut in September reflected this confidence. He stated that more employment and inflation reports will be considered before the Federal Reserve meeting in November.Controversy Over November Rate Cut Still Exists, Inflation Risks May Shake Market Optimism

The minutes of the meeting released overnight showed that Federal Reserve policymakers still have disagreements over the aggressive interest rate decision in September, further lowering the expectation of a rate cut. Some Federal Reserve officials have recently stated that they are currently inclined to slow down.

"People are worried that the Fed may pause the rate cut at the next meeting," said Bryce Doty, bond fund manager at Sit Investment Associates. "If the employment is strong, then the only factor that can make the Fed continue to cut interest rates is a moderate CPI."

"Even if the core CPI rises unexpectedly, we believe that the September report will not change the FOMC's view that inflation is on a downward trend," wrote Anna Wong, Chief U.S. Economist at Bloomberg Economics, in a report on Thursday.

She expects that after the Federal Open Market Committee cut interest rates by half a basis point last month, there will be a 25 basis point rate cut in November.

Goldman Sachs analyst Lou Miller said:

"The 10-year yield has risen 45 basis points from the low point, and if inflation shows more stubborn signs, it may gradually change the current 'Goldilocks' optimistic expectation that the Fed will cut interest rates in the context of strong U.S. economic growth and improving corporate earnings trends."

Strategist Dominic Wilson said:

"The market's reaction to rising inflation may be more intense than its reaction to cooling inflation, and the stock market may therefore experience a downward trend."He added that while the data may trigger a market downturn, the overall impact may not be as significant as previously anticipated. There are two specific reasons for this:

Firstly, due to the market having already readjusted its expectations for future interest rates, particularly with the expectation of a nearly 50 basis point increase in mid-2025, this implies that the market has absorbed some of the anticipated future rate hikes, potentially reducing the impact of future data on the market.

Secondly, there is a greater concern in the market about future data, which may make the actual market consensus more conservative than it appears on the surface. If the actual data performs better than expected, it would instead provide greater reassurance, as the "fear" may have already been digested in advance.