The current pricing in the stock and foreign exchange markets shows extreme divergence: the stock market is calm, while the currency market has hidden currents. Tonight, one side is destined to suffer a "face slap."

Written by: Xu Chao, Wall Street Insight

The impact of energy is driving overall inflation to accelerate, but core pressures are marginally easing, providing a window for the Federal Reserve to remain inactive.

The U.S. Bureau of Labor Statistics will release the September CPI data at 8:30 PM Beijing time tonight. Goldman Sachs, Citigroup, and other Wall Street investment banks predict that the overall CPI year-on-year increase is likely to jump from 3.4% in August to a range of 3.6% to 3.7%, mainly driven by rising energy prices; at the same time, the month-on-month increase in core CPI is expected to slightly narrow from 0.29% in August to between 0.18% and 0.24%, with stable housing inflation and a retreat in some service categories being the main reasons for the core cooling.

Before the data release, the latest statements from Federal Reserve officials have sent a clear signal to the market. The minutes of the September FOMC meeting released last week showed that "most" officials believe it is appropriate to raise rates once more this year, but several officials subsequently emphasized that there is no need for hasty action—Federal Reserve Board member Waller stated that there is no need for consecutive rate hikes, and Vice Chairman Williams added that another rate hike "may" be appropriate this year, but there will be no further tightening in 2027. As a result, the market's implied probability of a 25 basis point rate hike in October has plummeted from about 70% before the employment report to around 20%, while the probability of a rate hike in December remains around 72%.

Tonight's data will directly affect the policy expectations for the FOMC meetings on October 28 and December. If the core CPI comes in mildly, it will strengthen the resolve of the "patience faction"; if there is an unexpected broad increase in core inflation, it may reignite discussions of an October rate hike, but market analysts warn that the Federal Reserve has never raised rates at the October meeting before U.S. midterm elections.

Overall Inflation Surges, Energy is the Core Driver

According to Goldman Sachs, the overall CPI in September is expected to rise by 0.59% month-on-month and increase to 3.70% year-on-year, exceeding the market consensus expectation of 3.6% and significantly up from August's 3.40%. The energy component is expected to soar by 5.0% month-on-month, with retail gasoline prices climbing again as the main driver; the food component is expected to rise by 0.2% month-on-month.

Citigroup's forecast is more moderate, predicting a year-on-year increase in overall CPI of 3.6% in September, but also confirming that energy prices are the core factor driving overall inflation. Forecast data from Citigroup indicates that the year-on-year increase in energy prices is expected to reach around 21.6%, the highest level this year.

Airfare is a key indicator for observing the second transmission effects of energy shocks. Goldman Sachs predicts that September airfares will increase by 3.0% month-on-month, directly reflecting the ongoing rise in jet fuel prices. Goldman Sachs data shows that since the outbreak of the Iran war, spot prices for jet fuel in the U.S. have roughly doubled, and airlines are fully passing on the cost increases to ticket prices.

Core Inflation Marginally Slowing, Discrepancies in Predictions

Goldman Sachs predicts that the core CPI will rise by 0.24% month-on-month in September, corresponding to a year-on-year increase of 2.46%, both slightly below the market consensus (0.2% month-on-month, 2.5% year-on-year); Citigroup gives a more moderate prediction, forecasting a month-on-month increase in core CPI of only 0.18%, noting that the probability of it falling to 0.1% rounded down is greater than the probability of rising to 0.3%.

Goldman Sachs has identified three key component trends: first, auto inflation is rebounding, with second-hand car prices expected to rise by 0.5% month-on-month, new cars by 0.2%, and car insurance prices by 0.2%; second, housing inflation remains moderate, with owners' equivalent rent (OER) and primary residence rent expected to rise by 0.20% and 0.17% month-on-month, continuing its downward trend; third, airfares are up 3.0%, making them the most noteworthy pressure point in core inflation.

Citigroup, on the other hand, emphasizes that the abnormal spike in wireless communication service prices in August contributed about 10 basis points to core CPI, but this component's volatility pattern has been unstable since the methodological change in July 2025—historical patterns show that significant increases are often followed by even larger retreats. Citigroup forecasts a -0.5% increase for this component in September, which is a key reason for its core CPI being lower than Goldman Sachs' prediction.

PCE Inflation Forecast: Expected to Maintain Around 3%

CPI data is also an important input for the market's forecasts of the Federal Reserve's preferred core PCE metric. Goldman Sachs predicts that the core PCE will rise by 0.20% month-on-month in September, slightly lower than the core CPI prediction, due to the lower weights of new and used cars in the PCE basket, and the PCE data sources for airfares and medical services will show relatively mild increases.

Citigroup also predicts a month-on-month increase of 0.21% in core PCE for September, with a year-on-year rate maintained at 3.0%. The core PCE year-on-year growth rate tracked by Citigroup for the fourth quarter of 2026 is 2.9%, about 50 basis points lower than the Federal Reserve's latest forecast. Citigroup economists Veronica Clark and Andrew Hollenhorst point out that although the core PCE may still be higher than core CPI in the short term, monthly inflation data for the year is expected to continue showing signs of core inflation easing, with limited signs of spreading inflation pressure.

Forward Path: Core Inflation Expected to Further Decline by Year-End

Looking ahead to the next few months, both institutions expect core inflation to continue declining, though there are discrepancies in the pace and magnitude.

Goldman Sachs predicts a month-on-month increase in core CPI of about 0.2% in October, mainly influenced by seasonal factors resulting from missing data during last year's government shutdown; in November and December, it is expected to drop to about 0.1%, driven by continued easing of housing inflation and gradual fading of tariff-related price pressures. Based on this path, Goldman Sachs economists have a more optimistic view of the inflation outlook for 2027 compared to the market consensus.

Citigroup also forecasts that year-on-year core CPI will decline to around 2.3% in the next two months. However, both institutions clearly state that if disturbances in oil prices persist longer than expected, inflation risks will skew significantly to the upside. Brent crude is currently still above $105, and whether energy shocks can stabilize before the end of the year remains the biggest uncertain variable.

Federal Reserve Path: October Pause, December Undetermined

In summary, the current market consensus expectations are: overall inflation is hot due to rising gasoline prices, while core inflation remains moderate due to cooling housing, a combination that provides a basis for the Federal Reserve to maintain a "patient" stance while retaining the option for a rate hike in December.

Goldman Sachs believes that if the core CPI prints mildly, it will strengthen the arguments for the "wait" camp; if core inflation shows an unexpectedly broad strength, discussions of an October rate hike may be reignited—but the political time constraint of just one week before the midterm elections and the Federal Reserve's historical practices make the probability of an October rate hike very low.

Citigroup holds a relatively optimistic view on the downside path of core inflation before the end of the year, forecasting a core PCE of 2.9% for the fourth quarter of 2026, significantly lower than the Federal Reserve's official forecast of 3.4%. However, Citigroup also warns that persistent high energy prices, stronger corporate pricing intentions than pre-pandemic levels, and rising public inflation expectations are significant downside risks affecting the realization of this forecast.

Market Pricing: Stock Market Calm, Currency Market Turbulent

In terms of market pricing, various asset classes show clear differentiation.

According to Goldman Sachs' equity volatility trading desk, on the day of the CPI release this Wednesday, the quotes for S&P 500 straddles are only 52 basis points, the lowest level this year on a CPI release day, far below the recent average of 78 basis points; the quotes for Nasdaq 100 straddles are about 85 basis points, also lower than the average of 111 basis points. This pricing sends the signal that the stock market expects this CPI data to have almost no impact on risk assets.

The foreign exchange market, however, is entirely different. Goldman Sachs points out that the implied CPI event fluctuation range for the euro against the dollar is about 32 basis points, in the 77th percentile over the past year; the implied volatility for the dollar against the yen exceeds four times its historical median. The pricing of these three asset categories shows significant divergence on the same data, meaning one side is bound to be proven wrong.