The way US CPI forecasts are distributed impacts how the market reacts. A wide range of estimates matters since any surprises can lead to big shifts. When many forecasts are close at the high end, even data that comes in on the low side can be shocking. The current expectation for year-on-year CPI is 2.9%, with 73% of forecasts aligning with this number. Monthly CPI has a consensus of 0.3% at 67%, while the year-on-year Core CPI is expected to be 3.1%, with 86% agreement. The month-on-month Core CPI also stands at 0.3%, backed by 84% of analysts.

Focus on Core Numbers

The Core CPI figures are crucial, especially the 3.1% year-over-year and 0.3% month-over-month expectations. If the actual numbers differ from these, it can lead to significant market reactions. A lower report could raise the chances of a 50 basis point cut to 40-60%. In contrast, a stronger report might not change the expected 25 basis point cut this month but could influence projections for 2026. The release of US jobless claims data at the same time might overshadow the CPI data if there are large differences that could shift market dynamics. Forecasts for Core CPI are closely bunched around 3.1% year-over-year and 0.3% month-over-month, with over 80% of analysts in agreement. This strong consensus means that any deviation from these figures presents a real opportunity for traders. The market is set for a specific result, making it sensitive to surprises. This information is particularly vital following the August jobs report, which revealed an unexpected slowdown, with non-farm payrolls increasing by only 95,000 jobs, significantly lower than expected. The Federal Reserve has been indicating that their decisions depend on data, so a soft inflation report combined with a weak labor market could be very impactful. This single data point carries unusual weight for the Fed’s next rate decision.

Market Reactions to Core CPI Changes

If the Core CPI is below the 3.1% consensus, the market will likely adjust the odds of a 50 basis point cut at the next meeting. Currently, Fed Funds futures indicate only a 15% chance of such a cut, leaving room for a dovish shift. Traders might consider buying short-term call options on SOFR or Treasury Note futures to take advantage of this potential bond rally. On the other hand, if the report is hotter than 3.1%, the immediate expectation for a 25 basis point cut won’t change. However, this could lead to a more hawkish outlook for rate cuts in 2026, which the market currently sees as totaling 75 basis points. We witnessed this pattern in late 2023, when surprising inflation data made longer-term rate expectations rise. Traders could use put options on longer-dated bond futures to prepare for a similar situation. Additionally, we should monitor the weekly jobless claims figure released simultaneously, which has stayed around a low 220,000. If this number unexpectedly jumps above 250,000, it could indicate a crack in the labor market, overshadowing even a high inflation figure. This dual risk makes a volatility strategy, like an options straddle on a major index, worth considering. Create your live VT Markets account and start trading now.

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