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🏛 What does the Fed want?

Tomorrow, the U.S. consumer inflation data for August will be released. Expectations are -0.1% m/m, which will show a continued downward trend in inflation.

But the Fed already said last week that even a good inflation figure will not change the decision to raise the rate in September and beyond to 4%.

What, then, do they want but a slowdown in inflation?

1. The Fed is worried about the "breadth" of inflation.

The stalling of inflation in July came primarily at the expense of gasoline prices.

But the Fed needs all major categories of goods and services to start getting cheaper. The breadth (the number of categories that are rising) has reached the levels of the 70s, when almost 80% of the categories were growing faster than 5% y/y (pictured). This threatens inflation expectations and inflation spiraling out of control. So a slowdown just at the expense of gasoline and another couple of categories will not be able to calm the Fed.

2. The Fed needs a stop to inflation in housing, specifically rental rates.

Although the Fed talks about a broad index of inflation, it is core inflation, which is harder to stop, that they are most excited about.

If you look at the Core structure, literally one indicator can determine its momentum: 41% of the Core CPI is occupied by the rents index.

In rents, there are just the first hints of slowing growth. Rent went up 8.4% y/y in August - and that's a major expenditure item for Americans.

The drop in real estate prices has already begun. But for it to continue, the Fed can't signal softness, because rates and mortgages must remain expensive, keeping the housing market in check.

So even if at first glance the headline positive CPI numbers cheer up the market, don't relax.

Next, investors will be looking to see what lies inside the "report," especially in the Core sector. Trying to figure out how the Fed will react to it, and whether it will see what it needs to see.

- But on the positive side, here's some fresh data from the Federal Reserve Bank of New York: 1-year consumer inflation expectations in the U.S. fell to a 10-month low in August.

And 3-year expectations fell to a near 2-year low of 2.8%.

Consumers also see a strong job market and are not afraid of losing their jobs because they see an easy opportunity to find a new one.

So the chances of a soft landing for the U.S. economy are really high.

- Such is the current reality - next to the bad data come positive numbers. As a result, we are seeing continued market chatter.

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