US CPI in focus ahead of October FOMC Meeting

In focus today

In the US, the most important data release of the week will be the September CPI, released this afternoon. We forecast headline inflation at 0.5% m/m SA, 3.6% y/y (prior: 0.6% m/m, 3.4% y/y) and core inflation at 0.2% m/m SA, 2.5% y/y (prior: 0.3% m/m, 2.4% y/y), with energy prices being the main driver of the expected pickup in headline inflation. For the Fed, focus will be on whether underlying inflation pressures are broadening. With this being the final inflation print before the October FOMC meeting, and recent Fed communication signalling little urgency to hike again, we think it would take a clear upside surprise for the Fed to signal a rate hike already in October. 

In Sweden, we receive the final September CPI figures. Any revisions to last week's flash estimate will be closely watched after inflation came in slightly below expectations, mainly due to weaker services prices, while goods prices surprised on the upside. Energy prices were broadly in line with expectations and food prices somewhat softer, and the final release should provide a clearer picture of the components driving the outcome.

Economic and market news

What happened overnight

In China, trade and inflation data was stronger than expected in September. Export growth accelerated to 36.3% y/y (cons: 25.7%, prior: 25.0%), supported by continued strong shipments of EVs, batteries, microchips and other AI-related inputs, while higher memory chip prices also contributed. Imports rose to 31.0% y/y (prior: 28.2%), partly reflecting higher input prices and demand linked to the rapid data centre build-out. Producer price inflation surprised to the upside, rising to 5.0% y/y (cons: 4.4%, prior: 3.8%), driven by higher commodity and microchip prices. CPI inflation edged up from 0.9% y/y to 1.0% y/y, while core inflation was unchanged at 1.0% y/y. Weak consumer demand keeps CPI inflation muted despite the higher input prices from PPI.

What happened yesterday

In commodities, European TTF natural gas rose for a sixth consecutive session to around EUR 87/MWh, its highest level in almost four years, as colder weather forecasts in central Europe are expected to lift heating demand, while low wind speeds could increase gas-fired power generation. Storage levels below 74%, compared with around 90% normally seen at this time of year, left the market more exposed at the start of the winter heating season.

In the US, the NFIB Small Business Optimism Index fell 0.8 points to 97.9 in September, marking the second consecutive monthly decline and leaving the index close to its long-term average. Labour market indicators were mixed, as three-month hiring plans were unchanged at an elevated level, while the share of firms unable to fill positions declined for the second month in a row. Observed price plans remained unchanged, while expectations for future prices increased.

Also in the US, ADP's average weekly private employment increased by 24,750 over the four weeks ending 26 September, slightly below the upwardly revised 25,250 in the previous week. The small decline was driven by the upward revision to the prior estimate, while the data still points to private sector job growth recovering after a weak summer and moving closer to spring levels.

On the wires in the US, Fed's Waller (voter) noted that AI-related demand is already spilling over into inflation, while the productivity gains that could eventually ease price pressures will take time to emerge. Chicago Fed's Goolsbee (non-voter) struck a similar tone, warning that AI-related investment is beginning to look like aggregate overheating and risks broadening into more persistent inflation. This supports the case for keeping policy tight in the near term and leaves the comments hawkish on the margin.

Equities: Equities traded mostly lower yesterday, although the tone in Europe and the US was more constructive than in the preceding Asian session.

Once again, more S&P 500 constituents advanced than declined, underscoring the distinction between index performance and underlying breadth. The SOX fell for a fifth consecutive session, while defensives outperformed cyclicals for a sixth session. Weakness centred on the ongoing AI rotation, particularly memory, and a mixed opening round of US bank earnings.

Yet several indices remain close to all-time highs despite almost a week of defensive leadership. As we emphasised throughout Q3, against a backdrop of resilient macro and strong earnings, these moves look more like rotation across sectors than broad deleveraging or a decisive shift towards risk aversion. A deterioration in the macro backdrop would warrant a different interpretation, but that is not what we are seeing.

Asian equities are recovering modestly this morning, with European and US equity futures also pointing higher.

FI and FX: The EUR swap curve continued to flatten while markets are paying closer attention to rising natural gas prices ahead of the heating season. ECB speakers signalled no clear second-round inflation effects yet but highlighted tighter financial conditions. In the US, Fed speakers gave mixed signals ahead of today's CPI release, which is expected to be the main market event. The broad USD rally paused as French fiscal stress eased slightly, supporting cyclicals such as SEK, NOK and NZD. Both SEK and NOK strengthened, with NOK helped by euro weakness and Norway's relatively strong fiscal position.