The US CPI in August was flat, will the script of "Fed's three consecutive rate cuts in 2024" be repeated?

The latest U.S. CPI inflation report for August shows that, excluding the highly volatile food and energy categories, the U.S. core inflation in August slightly rose as widely expected in the market. However, traders are still collectively betting that the Federal Reserve will announce the first interest rate cut of the year next week, with the vast majority betting that the Fed will cut rates by 25 basis points. After the release of exceptionally weak initial jobless claims data, some traders are betting that the Fed is severely "behind the curve," and they are wagering that the Fed will cut rates by 50 basis points in September to kick off a rate-cutting cycle. Following the release of CPI data that aligns with expectations, market pricing shows that the probability of the Fed cutting rates by 50 basis points in September has increased from less than 5% to around 10%. In addition, traders are increasingly betting on a rate-cutting path similar to that of 2024, namely three consecutive rate cuts starting in September. However, in contrast to 2024, when the Fed initiated a rate cut of 50 basis points in September, most interest rate futures traders are still betting that the Fed will cut rates by 25 basis points this September. According to the latest data released by the U.S. Bureau of Labor Statistics on Thursday, the so-called core Consumer Price Index (core CPI) rose by 0.3% month-on-month in August, in line with market expectations. After incorporating other components of price calculations, the overall CPI for August rose by 0.4% month-on-month, the largest increase in the CPI so far this year, slightly higher than the market's general expectation of 0.3%. In terms of year-on-year CPI data, the core CPI for August increased by 3.1%, which is largely consistent with previous readings and market expectations. The overall CPI increased by 2.9% year-on-year, also consistent with market expectations, but slightly higher than the previous reading of 2.7%. Statistical data shows that prices of goods excluding food and energy products are accelerating. This reflects an upward trend in prices for new and used cars, clothing, and household appliances. Among the services focused by the market, airline ticket prices saw the largest increase in over three years. Several household consumption expenses, including groceries, gasoline, electricity, and car maintenance, also showed a significant increase. The report indicates that inflation continues to hover over the U.S. economy, especially as President Donald Trump's global tariff policy is significantly impacting prices of some goods, while the continued rise in costs of certain services may pose a more persistent upward pressure on overall inflation in the U.S. Despite this, following a series of soft employment data, interest rate futures markets still widely expect that the Federal Reserve will announce the first rate cut of the year at next week's FOMC monetary policy meeting. However, if inflation remains robust in the coming months, and if CPI and PPI continue to expand beyond expectations under the transmission of tariff effects, it may complicate the expected path for further rate cuts at future FOMC meetings. At that time, the market may anticipate the Fed to stay put after one rate cutmeaning pause the rate cut pace after one cut in September. U.S. stock index futures continue to rise, while bond prices have also been trending higher as expectations for a Fed rate cut have increased. Before the September 16-17 meeting, Fed officials will also see the latest consumer confidence and retail sales data. The "CME FedWatch Tool" shows that interest rate futures traders widely expect the Fed to announce two more rate cuts after this, namely in October and December. One of the key drivers of inflation in recent years has been housing costswhich also constitute the largest category in the CPI statistics report. Data shows that housing prices rose by 0.4% month-on-month, the largest increase this year, reflecting increases in rental rates and the largest surge in hotel accommodation since November last year. Another core services indicator closely monitored by Fed policymakers (excluding housing and energy costs) has seen a decline, primarily driven by decreases in healthcare, entertainment, and car rental prices. While Fed policymakers emphasize the importance of such indicators when evaluating the overall inflation trajectory, they calculate this indicator based on a breakdown of another index, the PCE index, which may have slight discrepancies. The Fed's preferred inflation measurethe core Personal Consumption Expenditures Price Index (core PCE)has a lower weighting for housing compared to the CPI. The PCE index is derived from both the CPI and another release concerning producer prices, with the latter showing varied performance across categories included in the PCE. The Labor Department's watchdog overseeing the Bureau of Labor Statistics (BLS) announced on Wednesday that it is initiating a review to evaluate the challenges the agency faces in collecting and releasing key economic data. In recent months, the BLS has had to pause CPI data collection in several major metropolitan areas in the U.S. and has increasingly relied on a method to fill gaps in data. This review will also examine the revisions made by the BLS to employment data, which have sparked broader criticisms, especially under pressure from the White House. Fed officials are also closely monitoring CPI and wage growth data, as this helps in assessing consumer spending expectationsan essential engine of the U.S. economy. Another report released on Thursday that combines inflation data with recent wage data shows that real average hourly earnings increased by 0.7% year-on-year, the weakest in over a year, highlighting a continued cooling in the U.S. labor market, which also underscores the core logic behind the market's belief in the Fed's three consecutive rate cutsshifting the Fed's focus from combating inflation to addressing a soft labor market. Another report released shows that initial jobless claims in the U.S. jumped to the highest level in nearly four years last week, reinforcing expectations of a weak and cooling labor market. However, weekly claims data may fluctuate around holidays, and the statistics for last week included Labor Day. Ali Jaffery, a senior analyst at CIBC Capital Markets, pointed out that another indicator released this morningthe number of initial jobless claimsalso supports the view that the Fed will announce a rate cut in September. "Initial jobless claims jumped from 236,000 the previous week to 263,000. Of course, the inflation rate has not trended to 2%, but it is increasingly linked to price increases sparked by tariffs. At the same time, the non-farm employment market urgently needs the Fed to cut interest rates to provide support, and weak labor market conditions mean that future demand-side price pressure will weaken." The Fed's rate cut in September is all but a certainty, but the market diverges on whether it will be by 25 basis points or 50 basis points. Top Wall Street traders have been expecting the release of the U.S. August Consumer Price Index (CPI) data tonight to show a continued rise in inflation. Given the exceptionally weak non-farm employment data for several months and a substantial downward revision of 900,000 jobs in the non-farm employment from March 2024 to March this year, there are few traders who believe that this CPI inflation data can change the fate of the Fed's interest rate cut in September. While the Fed's rate cut at the September 16-17 meeting is already fully priced into the market, investors are still unsure whether the Fed will cut by 25 basis points or a more aggressive 50 basis points, and the rate-cutting path thereafter. The predictions for the Fed's monetary policy easing pace have been continuously changing in recent days. The U.S. non-farm employment increased by only 22,000 in August, well below the median estimate of 75,000 by economists. The unemployment rate in August rose to 4.3%, the highest since 2021, in line with economists' forecasts. Additionally, the already very weak non-farm employment figures for June and July were again revised downward by a total of 21,000 people, with the June employment data being revised to negative growtha monthly decline in employment for the first time since 2020leading some interest rate futures traders to leave room for predicting a larger half-percentage point rate cut and now expect more accommodative measures by the Fed by the end of 2025betting that the Fed will cut rates three times by the end of the year. Consequently, following the release of extremely soft non-farm data, it is argued in the market that the Fed's FOMC monetary policy decision should no longer be viewed from a preemptive rate cut perspective but as monetary policy being "slightly behind" the actual economic situation. Therefore, driven by the persistent weakness in employment and the sudden increase in political pressure, the extent of the Fed's rate cut in September and the dovish signal it sends may exceed general expectations. Will the Fed follow the loose pace of 2024 and show "three consecutive rate cuts"? On Thursday, the U.S. government report showed that initial jobless claims jumped to the highest level in nearly four years, leading interest rate futures markets to continue betting on a Fed rate cut. The bets have shifted from predicting at least two cuts by the end of the year to betting on four consecutive cuts from September to January next year, completely pricing in three rate cuts by the end of the yearmeaning the Fed will cut rates at each meeting for the rest of the year by 25 basis points. Economists at Barclays Bank have adjusted their forecasts, now predicting that the Fed will cut rates three times by 25 basis points each this year, followed by two more cuts in 2026, aligning with prevailing expectations from major institutions like Goldman Sachs. This reflects how the market has shifted the Fed's policy focus from fighting inflation to addressing potential economic slowdown. However, there is still significant divergence on the extent of the rate cut in September and whether the Fed will cut rates three times for the remainder of this year or take a more conservative approach with 1-2 cuts. Bank of America takes a relatively cautious stance on the Fed's rate-cutting path for 2025. Economists at the Wall Street financial giant, Bank of America Corp., based on the exceptionally weak August non-farm employment data, now expect the Fed to announce two rate cuts this yearexpected in September and December, shunning the hawkish monetary policy expectation that had been seen as an outlier on Wall Street, namely the longstanding anticipation by BoA that the Fed would wait until next year to take rate-cutting action. Now, with significant fractures appearing in the labor market and multiple data indicating a sharp slowdown in the U.S. economy, BoA has completely abandoned the hawkish expectation of "no rate cuts all year." A recent research report from international financial giant Mizuho shows that the Fed is likely to kick off a new cycle of rate cuts at the upcoming September monetary policy meeting, signaling a shift in policy focus from inflation fighting to growth support. Mizuho believes the Fed will start rate cuts cautiously but decisively and then "pursue dovish easing policies to the end"betting that the Fed will continue its loose monetary policy trend at the remaining two monetary policy meetings in 2025 and in March 2026 will reduce the federal funds rate to around 3%, a neutral rate level according to Mizuho's forecast, indicating a significant decrease from the current range around 4.25%.