Due to the US government shutdown, the release of September CPI data was moved back to 24 October from the original date of 15 October. We expect to see core CPI inflation remaining elevated in September at 0.34% m-o-m, after a 0.346% advance in August. We expect core goods inflation accelerated to 0.43% m-o-m in September from 0.28% in August as the impact of tariffs continued to materialize. Super-core components appear to have picked up slightly to 0.37% m-o-m in September, driven by a rebound in medical care service prices. Based on our CPI and PPI forecast, we expect core PCE inflation accelerated to 0.30% m-o-m in September from a 0.23% advance in August. We expect the uptick in core inflation to persist till Oct readings and then move downwards due to base effects as well as slowing down in consumer spending due to weaker employment conditions accelerated by continued US shutdown. Summary: A hot CPI reading for Sep along with a possible hot reading for Oct might be treated as one off bump in good prices by Fed when seen in context of a likely -ve NFP no for Oct payroll. Between the price stability mandate & the employment mandate, the deviation of employment mandate will be higher. Hence, we continue to expect a front-loaded rate cut cycle of 25 bps each in the next 4 Fed meetings. Currently the market is pricing in 51 bps of cut till Dec’25 and another 37 bps till March’26. We expect this to move towards full 50 after the release of Oct NFP data in early Nov. But in extreme short term, we expect short end rates to move up by 10-15 bps. So, the 2yr UST which closed at 3.46 on Friday should test 3.55-3.6 before eventually moving lower towards 3.25 when market starts appreciating the weakness in the employment data.
