Even if inflation heats up tomorrow night, it will be difficult to disturb the U.S. stock market, as employment data leads the market direction

According to the Zhitongcaijing APP, Wall Street's trading department expects the Consumer Price Index (CPI) to rise significantly, but they believe the stock market will not experience major fluctuations as employment data remains the main focus of the market.

Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, pointed out that options traders are betting that the S&P 500 index will only experience a slight fluctuation of about 0.7% after the CPI report is released. This expectation is lower than the average actual fluctuation of 0.9% on CPI days over the past year and also lower than the implied volatility expectation when the employment report was released on October 3.

The current core contradiction in the market lies in how to interpret the Federal Reserve's interest rate trajectory—recent employment data has shown that the level of economic weakness has reached a critical point threatening growth. Therefore, the market generally expects the Federal Reserve to cut interest rates by 25 basis points at the September 17 meeting and possibly continue to cut rates in October and December, with cumulative rate cut expectations exceeding 100 basis points over the next year.

If inflation data rises above expectations, it could disrupt this rate-cutting process. Andrew Taylor, head of global market intelligence at JP Morgan, emphasized in a report that while there is currently no clear evidence forcing the Federal Reserve not to cut rates in September, if inflation expectations strengthen significantly, the Federal Reserve may adjust its policy path for October and December.

Several large banks have adjusted their forecasts. For example, economists at Barclays currently expect the Federal Reserve to cut rates three times this year, each by 25 basis points, and to cut rates two more times in 2026.

The CPI will become another indicator for U.S. traders to analyze the Federal Reserve's interest rate path.

Currently, economists generally predict that the core CPI (excluding food and energy) will rise by 0.3% month-on-month in August, with a year-on-year increase of 3.1%, unchanged from the previous value but far exceeding the Federal Reserve's target level of 2%. Taylor's team analyzes that if the month-on-month increase in core CPI is between 0.3% and 0.35%, the S&P 500 index's fluctuation may range from a decline of 0.25% to an increase of 0.5%; if the increase narrows to between 0.25% and 0.3%, the S&P 500 index may rise by 1% to 1.5%; if the increase further drops below 0.25%, the S&P's increase may expand to 1.25% to 1.75%. However, if the month-on-month increase exceeds 0.4%, the S&P index may drop by as much as 2%, although Taylor believes the probability of this happening is only 5%.

Due to resilient economic growth, traders expect manageable risks in the coming weeks. The Atlanta Fed's GDPNow model shows that the annualized growth rate of real GDP in the third quarter is expected to reach 3%, slightly lower than the 3.3% in the second quarter, but still at a strong level. This also explains why the Chicago Board Options Exchange Volatility Index (VIX) is far below the key level of 20—traders only begin to worry once this level is reached. Meanwhile, the Citigroup U.S. Economic Surprise Index, which measures whether economic indicators exceed expectations, is close to its highest level since January

An unexpected rise in the index is usually a positive signal for the stock market. However, in the current situation, if there are many unexpectedly strong economic data, this may complicate the Federal Reserve's goal of controlling inflation and force the institution to maintain higher interest rates for a longer period.

Citi's Kaiser summarized that the labor market remains a key variable. If the Federal Reserve cuts interest rates in October, it likely means that employment data is still under pressure while inflation has not shown unexpected upward movement