Wall Street anticipates rate-cut size based on August U.S. CPI [New York market weekly outlook]

Employment slowdown, focus on CPI·PPI

Expectations grow for a 50bp cut at the September FOMD

This week on the New York market (8–12), investors are expected to gauge the size of the September rate cut based on the Producer Price Index (PPI) scheduled for the 10th and the Consumer Price Index (CPI) due on the 11th.

On the 5th (local time), the three major New York stock indexes opened at record highs but then fell as selling pressure emerged. The market unease stemmed from a sharp drop in U.S. nonfarm payrolls for August.

With cooling employment in mind, investors are expected to focus on the two inflation indicators released this week.

This week brings August CPI and PPI. With employment cooling, a September rate cut is assumed, and the possibility of a 'big cut (50.5% point rate cut)' has emerged, increasing attention on the inflation data.

According to the CME FedWatch tool, federal funds rate futures imply a 65.3% probability of a 75bp cut by December (1bp is 0.01 percentage point) and a 7.7% probability of a 100bp cut. The possibility of a 100bp cut could disappear depending on the strength of inflation.

Gregory Rafanello, head of U.S. rates at AmeriVet Securities, said, "It is true that inflation remains above the U.S. central bank (Fed)'s target, but the market is now paying more attention to labor market trends than anything else," adding, "The situation could change in a few months, but that is the current sentiment."

There are also signs of weakening consumption. According to a recent report from the Federal Reserve Bank of New York, the rate of credit card delinquencies over 90 days in Q2 stood at 12.27%. This is only 1.4 percentage points below the 13.7% recorded in Q2 2011, the historical high.

Financial data firm FactSet expects August CPI to register a 2.9% year-on-year increase. Core CPI, which excludes volatile food and energy, is forecast to rise 0.3% month-on-month and 3.1% year-on-year.

New York=Correspondent Park Shin-young nyusos@hankyung.com