TLDR:
- US equity futures slightly lower ahead of key inflation data
- Consumer Price Index (CPI) report for September due at 8:30 a.m. ET
- Expectations: 2.3% annual headline inflation, 0.1% monthly rate
- Recent strong jobs data has reduced expectations for Fed rate cuts
- Markets near record highs, but inflation surprise could shake things up
US financial markets are poised for a crucial update on inflation as investors await the September Consumer Price Index (CPI) report, scheduled for release at 8:30 a.m. ET on Thursday.
This key economic indicator comes at a time when major stock indices are trading near all-time highs, and expectations for Federal Reserve interest rate cuts have been shifting.
The CPI report is expected to show annual headline inflation at 2.3% and a monthly rate of 0.1% for September, both figures slightly lower than August’s readings. These projections suggest a continued moderation in inflationary pressures, which could support the Federal Reserve’s current policy stance.
However, recent economic data has complicated the picture. A surprisingly strong jobs report for September has forced traders to reassess their expectations for interest rate cuts.
Just a week ago, markets were pricing in a near-certainty of a 25-basis-point rate cut in November. Now, there’s a 21% chance that the Fed might hold rates steady, according to the CME FedWatch Tool.
This shift in sentiment is reflected in the movement of Treasury yields. The yield on the 10-year Treasury note has climbed above 4%, reaching levels not seen since late July. This upward move in yields suggests that investors are preparing for the possibility of higher interest rates for a longer period.
In the stock market, futures for major indices are pointing to a slightly softer open. Dow Jones Industrial Average futures were down 0.1%, while S&P 500 and Nasdaq 100 futures both dipped about 0.2%.
This cautious stance comes after both the Dow and the S&P 500 reached new record highs on Wednesday, highlighting the delicate balance between optimism about economic resilience and concerns over persistent inflation.
The potential impact of the CPI report on market sentiment cannot be overstated. While stocks have shown resilience in the face of recent economic data, a significant surprise in the inflation figures could lead to increased volatility.
Analysts suggest that while markets might be able to absorb a slightly higher-than-expected CPI print, a substantial upside surprise could trigger a more pronounced market reaction.
The Federal Reserve’s recent communications have also added nuance to the economic outlook. Minutes from the Fed’s September meeting revealed that a majority of rate-setters had supported a 50-basis-point cut in interest rates. However, some officials preferred a more gradual pace of easing, highlighting the divergent views within the central bank.
As investors digest these various factors, they’re also turning their attention to the start of the third-quarter earnings season. Delta Air Lines kicked things off with results that fell short of expectations, potentially setting a cautious tone for the reporting period.
Major financial institutions JPMorgan Chase and Wells Fargo are set to report their earnings on Friday, which could provide further insight into the health of the US economy.
Looking ahead, market participants will be watching closely to see if corporate profits can justify the roughly 20% rally in the S&P 500 this year. Current projections suggest a 4.7% increase in quarterly earnings compared to the same period last year, though this estimate has been revised downward from earlier forecasts.
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