Interest rate cut expectations outweigh inflation concerns, making it difficult for the U.S. September CPI to change the optimistic atmosphere in the U.S. stock market

According to the Zhitong Finance APP, investors are expected to ignore any signs of persistent inflation in the U.S. September Consumer Price Index (CPI) report this Friday, as market sentiment remains dominated by optimistic expectations for a Federal Reserve rate cut next week. Economists currently expect the U.S. September core CPI (excluding volatile food and energy prices) to rise 0.3% month-on-month and 3.1% year-on-year, unchanged from last month, still well above the Federal Reserve's 2% target.

JPMorgan's trading department believes that even if economists expect inflation data to exceed expectations, there is still about a 65% chance that the S&P 500 index will rise after the data is released. Analysts at the bank noted that volatility in the U.S. stock market on the day the September CPI is announced may be "lower than usual," as investors anticipate that the Federal Reserve will cut rates again on October 29, and this confidence may offset concerns related to inflation.

Andrew Tyler, head of global market intelligence at JPMorgan, stated in a client report on Wednesday: "We agree with the market's view that the Federal Reserve will not pause its actions unless extreme tail risk events occur."

Andrew Tyler and his team predict that if the CPI data is in line with or below expectations, the S&P 500 index could rise by as much as 1.5% on Friday. Conversely, if the core inflation month-on-month increase exceeds 0.4%, it could lead to a decline of about 2.3% in the S&P 500 index.

This Friday's "delayed" CPI data will be the first major economic report released since the U.S. government shutdown on October 1, making it significant for investors. This data will be one of the few clear signals reflecting economic conditions before the Federal Reserve's next interest rate meeting and may set the tone for the remainder of the year in the market.

Stephanie Link, chief investment strategist and portfolio manager at HighTower Advisors, stated: "Although this is lagging information, it will still serve as an important reference for the market in the context of scarce economic data due to the government shutdown." She believes that any volatility brought by the data will be a buying opportunity against the backdrop of rate cuts, corporate earnings growth, and a seasonally strong fourth quarter.

With signs of a slowdown in the labor market, Wall Street is generally betting that the Federal Reserve will cut rates two more times this year, with one cut almost fully priced in for next week's Federal Reserve policy meeting. However, if Friday's inflation data significantly exceeds expectations, it could complicate the outlook for further rate cuts by the end of this year or even early 2026.

Sameer Samana, head of global equity and real assets at Wells Fargo Investment Institute, stated: "Higher inflation data may cause policymakers to hesitate at the December meeting. However, given their current focus on the cooling labor market, a rate cut in October still seems prudent. The situation thereafter will be more uncertain, but we still believe they will also cut rates in December." Since the low point in April, the S&P 500 index has risen by about 35%. However, the rebound in the U.S. stock market is beginning to show signs of fatigue, with high valuations combined with uncertain economic prospects and divergent corporate earnings performance weakening market momentum.

In this regard, Sameer Samana stated that while CPI data may trigger short-term volatility, expectations of loose monetary policy will offset the impact. He advised clients to ignore the noise and continue buying high-quality stocks. He pointed out that investors have recognized that the Federal Reserve has limited room for action in the context of a cooling labor market, which is also the reason for the shallow and short duration of recent U.S. stock market pullbacks.

Additionally, the U.S. government shutdown has entered its 23rd day, marking the second-longest government shutdown in U.S. history, second only to the 35-day shutdown during Trump's term in 2018. Cayla Seder, a macro multi-asset strategist at State Street, noted that the current inflation data is more closely watched not because of the deadlock in Washington, but due to the stage of the economic cycle—where the labor market is slowing down while inflation remains stubbornly high.

Cayla Seder stated that while the higher CPI reading on Friday is unlikely to have a significant impact on the stock market, it may reverse the recent broad upward trend in the stock market. She said, "Higher inflation will limit the Federal Reserve's ability to ease policy, which will pose resistance to sector rotation and breadth expansion in the market. This situation will encourage funds to flow more into high-quality segments of the market that are less sensitive to interest rate changes."