Expectations of interest rate cuts overshadow inflation concerns, US September CPI unlikely to change optimistic atmosphere of US stock market.

Investors are expected to ignore any signs of persistent inflation in the September Consumer Price Index (CPI) report this Friday, as market sentiment continues to be dominated by optimistic expectations of a Fed rate cut next week. Economists currently predict that the core CPI for September (excluding volatile food and energy prices) will rise by 0.3% month-on-month and 3.1% year-on-year, remaining unchanged from the previous month and still well above the Fed's 2% target. J.P. Morgan's trading department believes that even if economists expect inflation data to be higher than expected, there is still a 65% chance that the S&P 500 index will rise after the data is released. The analysts at the bank point out that the volatility in the U.S. stock market on the day of the September CPI release may be "lower than usual" because investors are anticipating another rate cut by the Fed on October 29, which could offset concerns related to inflation. J.P. Morgan's global market intelligence chief, Andrew Tyler, stated in a client report on Wednesday, "We agree with the market's view that the Fed will not pause unless there is an extreme tail risk event." Andrew Tyler and his team predict that if the CPI data is in line with expectations or lower, the S&P 500 index could rise by up to 1.5% on Friday. On the other hand, if core inflation exceeds 0.4% on a monthly basis, it could lead to a drop of around 2.3% in the S&P 500 index. This "belated" CPI data on Friday will be the first significant economic report released since the U.S. government shutdown on October 1, making it significant for investors. The data will be one of the few clear signals reflecting the economic conditions before the Fed's next interest rate meeting and could set the tone for the market for the remainder of the year. Stephanie Link, Chief Investment Strategist and Portfolio Manager at HighTower Advisors, stated, "Though it is lagging information, in the scarcity of economic data caused by the government shutdown, it will remain an important reference for the market." She believes that with rate cuts, corporate profit growth, and a strong fourth quarter seasonality in the background, any volatility brought by the data will be a buying opportunity. Given signs of a slowdown in the labor market, Wall Street generally expects the Fed to cut rates twice more this year, with one rate cut almost fully priced in at next week's Fed policy meeting. However, if Friday's inflation data significantly exceeds expectations, it could complicate the prospects for further rate cuts at the end of the year and even early 2020. Sameer Samana, Global Equity and Real Asset Strategist at Wells Fargo Investment Institute, stated, "Higher inflation data may make policymakers hesitant at the December meeting. But given their current focus on cooling labor market conditions, an October rate cut remains a prudent move. The situation afterwards will be more uncertain, but we still believe they will also cut rates in December." Since its lows in April, the S&P 500 index has risen by approximately 35%. However, the rebound in the U.S. stock market is showing signs of fatigue, with high valuations and uncertain economic prospects combined with differing corporate profit performances leading to weakened market momentum. Sameer Samana stated that while CPI data may trigger short-term volatility, expectations of loose monetary policy will offset the impact. He advises clients to ignore the noise and continue to buy high-quality stocks. He pointed out that investors have recognized the limited room for Fed action in a cooling labor market, which is also why recent pullbacks in U.S. stocks have been shallow and short-lived. In addition, the U.S. government shutdown has entered its 23rd day, making it the second-longest shutdown in U.S. history, second only to the 35-day shutdown during Trump's term in 2018. Cayla Seder, Macro Multi-Asset Strategist at State Street, pointed out that what makes this inflation data more noteworthy is not the deadlock in Washington, but the stage of the economic cycle - the labor market is slowing down while inflation remains stubbornly high. Cayla Seder stated that while a higher CPI reading on Friday is unlikely to have a significant impact on the stock market, it could reverse the recent trend of widespread stock market gains. She said, "Higher inflation will limit the Fed's ability to ease policy, which will pose resistance to sector rotation and broadening market breadth. This situation will encourage more funds to flow into high-quality market segments that are less sensitive to interest rate changes."