The print is expected to show a modest increase in inflation, with headline CPI rising by 0.1% month-over-month (MoM) and core CPI by 0.3% MoM. According to BofA, this would be more of a “bark than bite” moment for the markets, with limited implications for the Federal Reserve’s path.
While the initial reaction to a 0.3% core CPI print might lead to some volatility, especially in the US Treasury (UST) market, the impact will be short-lived. They project core PCE inflation at 0.18% MoM, which aligns with the recent trend and is consistent with the Fed’s 2% target.
“This, in our view, should encourage market pricing for a 25bps cut in November,” strategists said, unless inflation accelerates more than expected. For the market to consider a higher chance of no rate cut, BofA notes that a core PCE reading of 0.3% or higher would be necessary.
In the bond market, BofA expects a resurgence of buying interest in USTs if the CPI report confirms that disinflation remains on track.
“CPI will be a test for whether buyers return to the UST market after the recent selloff,” BofA noted.
A print in line with their forecast would likely lead to a rally concentrated in shorter maturities, as investors remain cautious about election risk and the possibility of a hard landing.
BofA also points out that the upcoming CPI report will be important for gauging market sentiment toward the Fed’s November meeting.
While the market currently assigns a 16% chance of the Fed holding rates steady in November, the bank does not expect a single month’s data to drastically alter the Fed’s policy direction.
“Even after the strong payrolls report, Fed speakers still indicate a bias for additional cuts, and it would be very unlikely in our view for the Fed to adjust the direction of policy from one month’s data,” strategists continued.
In terms of broader market sentiment, BofA remains neutral on breakevens (BEs), pointing out that recent rallies have been driven by improving risk sentiment and rising oil prices. However, it remains skeptical about the sustainability of these drivers, particularly as their equities team forecasts a year-end S&P 500 level below current prices.
Further increases in oil prices, they believe, will depend on geopolitical developments in the Middle East.
Source: Economy - investing.com
