September inflation data could confirm market bets that Fed rate have peaked

The Commerce Department will publish its first estimate of September inflation Thursday with investors looking for confirmation that recent Fed rate signals, as well as a sharp pullback in Treasury bond yields, suggests muted price pressures over the coming months.

Economists expect headline readings on both a monthly and annual basis will show inflation slowing over the month of September, with the former expected at 0.3% and the latter likely to come in at 4.1%.

Markets are likely to focus on the core reading, however, given that the Fed has indicated it is far more reflective of both the pressures Americans face in their day-to-day spending and, as a result, is often connected to wage increases that can engender feedback loops that keep prices elevated.

Core CPI likely held at its August pace of 0.3% last month, according to Street forecasts, but slowed to around 4.1% on an annualized basis.

A modestly faster-than-expected reading for producer prices yesterday, which showed factory gate inflation 0.5% on the month and 2.2% on the year, could set the stage for an upside surprise in today's CPI report, but muted wage gains from Friday's September non-farm payroll report, which included the addition of 336,000 new jobs last month, suggests more risk to the downside.

"The forces which drove up core inflation—excess demand, the supply chain crunch, rapid wage growth, Covid driven chaos in the rental property market, and soaring food and energy prices—continue to abate," said Ian Shepherdson of Pantheon Macroeconomics. "We remain firmly of the view that core inflation will fall faster than the Fed expects over the next year." 

Wall Street appears to be adopting that view as well, with traders placing the odds of another Fed rate hike between now and the end of the year at around 27%, while at the time suggest a rate cut could come as early as June, according to data from the CME Group's FedWatch.

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