Analysts at Bank of America have indicated that the non-farm employment data for September is positive for the market. However, it also prompts investors to brace for the latest inflation figures. Last week's significant employment report has intensified the pressure on the upcoming Consumer Price Index (CPI) data. A surprising uptick in inflation could trigger market volatility. The CPI data, scheduled for release, is no longer considered a 'non-event' by market participants.
Following the robust employment report, analysts believe the significance of this week's CPI has increased. A substantial surprise in the data could disrupt the easing cycle and introduce more market fluctuations. Options prices suggest that the S&P 500 index may move by 109 basis points upon the CPI release, exceeding its three-month average fluctuation on CPI release days by a notable margin.
On a positive note, analysts assert that if combined with strong macroeconomic data, the market could withstand a minor surprise increase. As long as inflation doesn't surge, positive news remains favorable for the stock market. Historically, lower inflation levels are associated with rising stock prices and interest rates, while higher inflation levels lead to declines.
Economists predict that the CPI report will show continued easing of inflation, with a year-on-year increase of 2.3% compared to August's 2.5%. As the inflation rate approaches the 2% target after years of struggle, the Federal Reserve's focus has increasingly shifted towards the labor market. This change was a key reason behind last month's significant interest rate cut.
Despite the unexpectedly strong employment report in September, some economists continue to express concerns about inflation. If the CPI data surprises on the upside, the Fed might be compelled to refocus on inflationary pressures. A UBS economist suggests that a rapid increase in prices, alongside robust labor data, could lead to the Fed maintaining its current stance at the upcoming November meeting.
Following the release of the September employment report, the likelihood of a 50 basis point rate cut next month dropped to zero, as per CME FedWatch data. Traders are now less certain about even a 25 basis point reduction, increasing the importance of Thursday's CPI report in determining the Fed's next move.
