- US inflation increased by 0.2% in September, above estimates of a 0.1% increase.
- US jobless claims jumped to 258,000, above estimates of 230,000.
- Economists expect the Producer Price Index to increase by 0.1%.
Interest futures fell on Thursday as mixed US data led to a slight decline in Fed rate cut expectations. Data showed that inflation in September was higher than expected. Meanwhile, employment figures showed weakness in the labor market last week.
US core inflation (Bureau of Labor Statistics)
Consumer Price Index figures on Thursday revealed that inflation increased by 0.2% in September, above estimates of a 0.1% increase. Meanwhile, on an annual basis, it rose by 2.4%, beating forecasts for a 2.3% increase. Core inflation also came in above estimates. The unexpected numbers lowered expectations for a November Fed rate cut. A strong economy and higher-than-expected inflation ease pressure on the Fed to lower borrowing costs.
However, another report showed that US jobless claims jumped to 258,000, above estimates of 230,000. A higher-than-expected number of claims indicates rising unemployment and loose labor market conditions. This was a sudden shift from the view that the labor market is resilient. Recent monthly figures revealed a jump in job growth and easing unemployment, Leading to a significant drop in rate cut bets.
At the moment, markets are pricing an 80% chance of a 25-bps rate cut. At the same time, there is a 20% likelihood that the Fed will pause in November. The CPI report had a small impact on rate cut bets because policymakers remain confident that inflation will reach the 2% target. As a result, their focus has shifted to growth, especially in the labor market.
Fed’s Austan Goolsbee said he sees gradual rate cuts in the near future. At the same time, John Williams noted that the Fed will likely continue lowering borrowing costs. Meanwhile, FOMC meeting minutes earlier in the week revealed that most policymakers supported the massive rate cut in September.
However, interest futures have fallen since last week as it became clear that the Fed will likely continue at a gradual pace. This has boosted the dollar and Treasury yields. The next major report will show the state of wholesale inflation, further shaping the outlook for Fed rate cuts. Economists expect the Producer Price Index to increase by 0.1% after a 0.2% increase in the previous month. Another unexpected jump will increase the likelihood of a pause at the November meeting.
