Upcoming inflation data unlikely to stand in the way of Fed rate cuts, UBS says

Investing.com – The release of the consumer price index (CPI) data for September on Thursday is expected to show that price pressures continued to moderate at the end of the third quarter.

The data, coming on the heels of Friday’s robust jobs report, is likely to shape expectations around the size and pace of Federal Reserve interest rate cuts in the coming months.

Producer price data on Friday is also expected to point to tamer inflation.

In a note to clients, analysts at UBS said they do not expect the inflation print will stand in the way of additional Fed borrowing cost reductions this year following a jumbo 50-basis point drawdown by the central bank last month.

“With inflation slowing, we expect 50 basis points of Fed easing in the last two meetings of 2024, and a further 100 basis points of cuts in 2025,” the analysts wrote.

They flagged that the pace of these cuts could change if a recent waning in inflation stalls or the labor market remains resilient, although they noted this was “not our base case.”

Bets for another super-sized cut were all but eradicated following last week’s bumper US employment report. According to the CME Group’s (NASDAQ:CME) FedWatch Tool, there is now a 94.5% probability the Fed will slash rates by a more traditional quarter percentage point, and a 5.5% chance policymakers will choose to leave borrowing costs unchanged at its current range of 4.75% to 5.00%.

The US economy added 254,000 jobs last month, increasing from an upwardly-revised mark of 159,000 in August, according to a closely-watched Labor Department report. Economists had anticipated a reading of 147,000.

Meanwhile, the unemployment rate decelerated to 4.1%. Forecasts had seen the figure matching August’s pace of 4.2%.

Average hourly wages rose by 0.4% on a monthly basis, faster than predictions of 0.3% but slightly slower than an upwardly-adjusted August mark of 0.5%.

The 30-stock Dow Jones Industrial Average posted a record closing high on Friday, while the tech-heavy Nasdaq Composite added 1.2% and the benchmark S&P 500 grew by 51 points or 0.9%. The increases helped the major indices eke out a fourth consecutive positive week despite looming concerns over the impact of an escalating conflict in the Middle East.

“[O]ur view remains that the rally in the equity market remains well supported,” the UBS analysts said.