CPI Report Should Open Opportunities for Dip Buying, According to BofA

Bank of America strategists indicated that the upcoming consumer price index (CPI) report for September may present an opportunity for investors to engage in dip buying. In a recent note, they suggested that the report is anticipated to reflect a modest uptick in inflation, with headline CPI expected to rise by 0.1% month-over-month (MoM) and core CPI by 0.3% MoM. According to the strategists, this scenario is seen as more of a “bark than bite” situation for the markets, with minimal implications for the Federal Reserve’s monetary policy.

While a core CPI increase of 0.3% may prompt some initial volatility, particularly in the U.S. Treasury market, the effects are expected to be temporary. The expectation for core personal consumption expenditures (PCE) inflation is projected at 0.18% MoM, aligning with recent trends and consistent with the Fed’s 2% inflation target.

The strategists believe this data could encourage the market to price in a 25 basis points cut in interest rates for November unless inflation accelerates unexpectedly. Should the core PCE reading reach 0.3% or higher, the likelihood of a rate cut could be diminished.

In the bond market, a confirmation from the CPI report that disinflation is progressing could lead to renewed buying interest in U.S. Treasuries. The report is viewed as a crucial indicator for whether buyers will return to the Treasury market following recent selloffs.

Should the CPI readings align with expectations, there may be a rally focused on shorter maturities, given investor caution regarding election risks and the potential for an economic downturn.

Additionally, the upcoming CPI report will serve as a key gauge for market sentiment ahead of the Federal Reserve’s meeting in November. Currently, the market indicates a 16% probability of the Fed maintaining steady rates in that month, but the bank believes a single month’s data is unlikely to significantly impact the Fed’s policy trajectory.

Despite the recent strong payroll numbers, Fed officials still exhibit a tendency towards further rate cuts, suggesting that it is improbable for the Fed to change its policy direction based on one month’s data.

On a broader scale, Bank of America maintains a neutral stance on breakevens, noting that recent rallies have been fueled by improving risk sentiment and rising oil prices. However, they express skepticism regarding the sustainability of these factors, especially as their equities team forecasts a decline in the S&P 500 by year-end. Any further increase in oil prices is perceived to be contingent on geopolitical developments in the Middle East.