25 or 50?

How today's inflation data compares to its historical distribution and a closer look at today's rate cut bets.

Mobius Intel Brief:

With one week until the Fed’s September 18 meeting, markets no longer question “if” the Fed will lower its policy rate. Instead, market bets are split between an inflation-focused 25 bps rate cut or a labor-focused 50 bps cut, making Wednesday’s consumer price index (CPI) inflation data a closely watched directional cue.

According to the Bureau of Labor Statistics (BLS), August’s all-item CPI gained 0.2% M/M and 2.5% Y/Y as easing energy prices lowered overall price growth rates for the fifth consecutive month.

  • At 2.53%, August’s 12M overall CPI growth fell below the 50YR seasonally adjusted median (See Chart)

Meanwhile, the Fed’s preferred “core” CPI gauge (stripped of food and energy) increased 0.3% from July and 3.2% Y/Y, beating median expectations and posting the highest M/M gain in four months.

  • At 3.2%, August’s 12M core inflation rate remained 14.3% higher (0.4% absolute) than the 50YR seasonally adjusted median inflation rate of 2.8% (See Chart)

  • Nine “core” inflation measures grew by more than 3% Y/Y in August, led by factors like vehicle insurance (+16.5% Y/Y) and shelter (+5.0% Y/Y). (See Table)

August’s higher-than-expected CPI result reverberated through Fed Funds futures markets, cutting traders’ 50 bps rate cut odds from 34% yesterday to just 13% this afternoon — the balance shifting in favor of a 25 bps cut (87%). (See Chart)

However, we offer a different perspective than speculators’ highly volatile policy rate bets.

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This commentary contains our views and opinions and is based on information from sources we believe are reliable. This commentary is for informational purposes, should not be considered investment advice, and is not intended as an offer or solicitation with respect to the purchase and sale of commodity interests or to serve as the basis for one to decide to execute derivatives or other transactions. This commentary is exclusively intended for Mobius clients and is not considered promotional material.