Will the CPI push the Federal Reserve to pull the trigger if Qiang Feinong hands in “interest rate hike” ammunition? The script for the September rate hike faced a critical test

As the geopolitical situation suddenly heats up due to the recent escalation in the scale of military strikes between the US and Iran, the already high international oil prices and international oil and gas energy shipping costs continue to rise, driving the market's inflation expectations for the US and the global economy to continue to heat up. However, it is against the backdrop of the worsening geopolitical situation and rising energy prices and global energy shipping that continues to face significant resistance, the upcoming US CPI inflation data for August may directly determine whether the Federal Reserve will return to the path of interest rate hikes at the September FOMC monetary policy meeting. The latest remarks by Federal Reserve Chairman Walsh and Waller, one of the Federal Reserve's governors, show that the burden of proof has been shifted — only a very meaningful decline in CPI can prevent the Fed from returning to raising interest rates.

The Zhitong Finance App notes that the US-Iran conflict is further affecting commercial shipping from clashes with military facilities, and the energy market is re-accounting for the risk of supply disruptions. After the US attacked the three Iranian tankers, Iran's Revolutionary Guard Corps also claimed that it would attack the relevant ships escorted by the US military; during the Asian trading session on September 7, international crude oil prices continued to show an upward trajectory. At one point, Brent crude oil futures prices were reported at 97.35 US dollars per barrel, and WTI crude oil was reported at 92.28 US dollars. Earlier statistics as of September 4 showed a cumulative increase of nearly 60% in Brent crude oil during the year. The macro meaning of this round of shock is not only that gasoline directly drives up overall inflation, but also that rising diesel, transportation costs, and insurance costs continue to squeeze corporate profits and terminal prices.

As hostilities between the US and Iran escalate again, market concerns about the long-term blockage of energy transportation in the Strait of Hormuz and the Strait of Mander, another critical energy transportation strait, have intensified. The two major maritime throats are creating a combined risk. On September 1, Kpler detected that only 4 commodity carriers passed through the Strait of Hormuz, far below the 10-day average of about 13; the Mander Strait also had only 18 ships on the same day, lower than the 10-day average of about 24 ships; the average daily traffic volume of commercial carriers in the Strait of Hormuz had dropped to about 10 ships over the past 10 days, the lowest since May.

From a longer-term perspective, the average daily traffic volume of the Strait of Hormuz before the war was about 130-140 ships, but at the height of the crisis it fell below 10% of the normal level; overall shipping volume in the Red Sea and the Strait of Mande dropped by more than 50% at one point due to Houthi attacks. Energy shipping costs also continue to rise, which may push the price system further upward.

For example, the route from Yanbu Port in Saudi Arabia to the southern port of China takes about 19 days; it takes about 48 days to bypass the Suez Canal, the Mediterranean Sea, Gibraltar, and the Cape of Good Hope. The voyage increased by nearly a month. The fuel cost rose from 1.26 million US dollars to 2.87 million US dollars, and about 1 million US dollars for the Suez Canal. The daily benchmark revenue for very large tankers from the Middle East region to China once rose to 423,736 US dollars in the first half of this year, and soon thereafter, the TD3C route round-trip equivalent rental income was close to 585,000 US dollars per day, close to the highest level in history; additional war insurance rates in the Strait of Hormuz also rose sharply from 1% to 7.5% to 10% of the hull value.

Against the backdrop of energy inflation and the continued rise in shipping costs, the number of new non-farm payrolls in the US surpassed expectations by 162,000 in August, and the unemployment rate remained at 4.1%, weakening the reason for the Federal Reserve to suspend policy tightening due to concerns about employment; however, the 3.1% increase in average hourly wages did not support directly equating employment resilience with wage inflation getting out of control. The hawkish signals released by Walsh in Jackson Hole and Waller's “be patient if inflation continues to improve” made the September 10 PPI and September 11 CPI the key tests before the September 15 to 16 interest rate meeting. Even the pressure to prove may shift from “why to raise interest rates” to “why the Fed still doesn't choose to raise interest rates.”

The overheated CPI report could force the Federal Reserve to raise interest rates in September! Employment concerns have abated, and inflation has become the “last hurdle” test for interest rate hikes

The newly announced resilience of non-farm payrolls mitigates concerns about interest rate hikes, and inflation performance will determine whether the market further takes into account the risk of austerity. If inflation cools down enough, the market will need to re-evaluate not only a rate hike, but also the risk of maintaining high interest rates for a longer period of time.

Federal Reserve Governor Christopher Waller deliberately or unwittingly focused the market on the August Consumer Price Index (CPI) report to be released on September 11 this week. He pointed out that this data will have a significant impact on his monetary policy decisions. He said that if inflation continues to make progress towards the Fed's 2% target, he will support keeping the policy unchanged and is willing to be patient.

Therefore, this week's report may send a clear signal to the market: when the Federal Reserve meets on September 16, whether the market needs to fully include the probability of interest rate hikes in the price, that is, set the price according to a 100% probability. Undoubtedly, the better-than-expected August employment report means that the Federal Reserve is no longer persuasive enough to suspend interest rate hikes on the grounds that the labor market is weak.

Coupled with Chairman Walsh's speech in Jackson Hole on August 28, unless the CPI report falls significantly below expectations, it will be difficult for the Federal Reserve not to raise interest rates in September.

Taken together, the burden of proof may have shifted. The Federal Reserve may no longer need data to justify the September rate hike; instead, it may require the CPI report to provide a reason not to raise interest rates.

Because of this, this week's CPI report will be of rare importance for some time, as it could be the last piece of the puzzle missing from the Federal Reserve's September rate hike. The market already anticipates that this report will be relatively hot, which means that even if the data is in line with expectations, it may be enough for the September rate hike to continue to be a very realistic option.

The bond market is pricing ahead of time, and the Federal Reserve's communication mechanism and expected management model are tested

Wall Street economists agree that the overall US CPI will rise 0.4% month-on-month in August, up from 0.1% in July, while the year-on-year increase will remain unchanged at 3.4%. Meanwhile, the core CPI is expected to rise 0.2% month-on-month, the same as in July, while the year-on-year increase will fall from 2.5% to 2.4%. The expectations of prediction markets such as Kalshi are similar.

However, it is worth pointing out that there is a risk that this week's data will be significantly higher than expected, as service sector inflation clearly heated up in August. According to the American Institute for Supply Management (ISM) service industry report, the payment price index rose from 70.3 in July to 72.6, which is also higher than 67.7 in June. Historically, changes in the ISM service payment price index have often been accompanied by changes in CPI data.

Energy prices are likely to put further upward pressure. Higher gasoline prices will directly drive up the overall CPI, while rising diesel prices may raise transportation costs, which will eventually spread to the wider economy.

The 2-year US Treasury bond may already be revealing to us the direction of monetary policy. The current 2-year US Treasury yield of about 4.4% indicates that the market expects the monetary environment to be significantly tightened in the future, while the effective federal funds rate is still far below this level.

Since the 1990s, in almost every cycle, 2-year US Treasury yields have often followed changes in inflation, and the effective federal funds rate often lags behind the 2-year US Treasury yield. Eventually, the federal funds rate will remain the same, and in some cases exceed it. Therefore, with the 2-year US Treasury yield currently approaching 4.4%, this historical relationship means that the Federal Reserve may still raise interest rates several times in the future.

Of course, Waller has only one vote, and Walsh has made it clear that the Federal Reserve wants to move away from traditional forward-looking guidance. But this brings up another question: what will happen if officials clearly tell the market that the policy will depend on the data released later, and the CPI meets or exceeds expectations, yet the Fed still does not raise interest rates? At that time, the question will no longer be just the September decision, but how exactly should the market understand the Federal Reserve's communication.

Qiang Feinong hands in “interest-rate hike ammunition”, will CPI pull the trigger on interest rates in September? Bank of America is betting on interest rate hikes, Citibank is betting on suspension

Stronger agriculture means that the Federal Reserve is more in a position to raise interest rates; it does not mean that it is already necessary to raise interest rates. Employment increased by 162,000 in August, plus a total of 55,000 people raised in the previous two months, reducing concerns about a sharp decline in employment; however, hourly wages rose 0.3% month-on-month and 3.1% year-on-year, which did not yet show that wage pressure was out of control at the same time. Interest rate futures traders show that the probability that the Fed will raise interest rates in September has risen to about 60%. To a certain extent, it shows that non-farm payrolls only increase hawkish bargaining chips and have not yet replaced inflationary judgments.

Where the opinions of top Wall Street institutions such as BlackRock, BMO, and Citi intersect — barriers on the employment side have been reduced, and policy suspense still depends on whether the combined and continuous improvement of CPI and PCE inflation is sufficient, rather than being determined by a non-farm payroll report alone.

The Bank of America strategist team said that the agency predicted a 0.22% month-on-month increase in core CPI, corresponding to about 0.24% month-on-month and 3.4% year-on-year, which is considered sufficient to support the September rate hike; Citi predicts that the core CPI will rise 0.184% month-on-month and fall to 2.3% year over year, tending to keep interest rates unchanged. The difference between the two companies' core CPI forecasts was 0.036 percentage points month-on-month, but rounded to one decimal place, both showed 0.2%. Therefore, Wall Street's real disagreement over whether the Federal Reserve will return to raising interest rates in September lies in the specific price breakdown, the mapping to PCE statistics, and the determination of Federal Reserve officials that “sufficient progress has been made in inflation.”

According to some economists, the policy anchor is still PCE inflation data, and CPI is important but incomplete evidence. Housing data has a high weight in CPI, and housing cooling can significantly reduce core CPI; PCE covers more medical expenses paid by employers and the government, so it may show different trends. Waller also specifically pointed out that some non-market service prices rely on estimates, and the extent of their contribution to the core PCE may exaggerate the underlying inflationary pressure he judged.

According to Citigroup strategists, strong employment has raised the inflationary evidence threshold required to maintain patience. CPI is still a key input for policy decisions, rather than a switch that automatically pulls the trigger for interest rate hikes. If core service prices and subsequent PCE data remain heated, it is possible to actually push the Federal Reserve towards a path of interest rate hikes. The Bank of America, on the other hand, said that moderate inflation will reinforce the suspension of interest rate hikes, the rebound in US debt, and the weakening of the US dollar; a renewed rise in inflation may prompt the Federal Reserve to raise interest rates at the September 15-16 meeting, once again pushing up real interest rates and the US dollar.