Newsquawk Preview: US CPI due Friday 11th September at 13:30BST/08:30EDT

SUMMARY: As has been well documented, this week's inflation reports will be crucial in determining what the Federal Reserve does at next week's meeting, with the CPI report taking on particular importance. The PPI metrics released on Thursday were mixed; headline M/M was slightly hotter than expected, while the Y/Y rate was in line. Core M/M was marginally cooler than the Wall Street consensus, with the Y/Y rate as anticipated. Overall, Friday's CPI report will be pivotal in shaping expectations for the September 16th FOMC meeting. A benign report showing continued progress on underlying inflation would strengthen the case for the Fed to remain on hold, particularly given Waller's stated reaction function. Conversely, a hot report or evidence that disinflation is reversing would likely reinforce expectations for a 25bp hike.

EXPECTATIONS: Core CPI is expected to rise 0.2% M/M in August, unchanged from the July print, while the Y/Y rate is anticipated at 2.4% (prev. 2.5%). Headline CPI is expected to rise 0.4% M/M, accelerating from the prior 0.1%, while the Y/Y rate is seen at 3.4% (prev. 3.4%).

WARSH: With the Federal Reserve broadly viewing the labour market as steady, reinforced by last week's strong labour market report, focus is firmly on the inflation side of the mandate. Under Chair Warsh's stewardship, the Fed has remained steadfast in its commitment to returning inflation to the 2% target. In his most recent remarks at Jackson Hole, Warsh said the Fed has more work to do unless underlying inflation is moving clearly towards the 2% objective at a sufficient pace. Governor Waller has also stressed the importance of the upcoming inflation data in determining his vote at the September meeting.

FOMC SEPT. CONFAB: As such, the CPI report will play a significant role in determining whether the FOMC opts for a 25bp rate hike or stands pat next week. At the time of writing, money markets are pricing in 17.5bps of hikes for September and 42bps by year-end, although this is likely to shift following the pivotal CPI release. Heading into the data, Oxford Economics expects underlying inflation in the upcoming CPI report to prove benign enough to keep the Fed on hold in September. Meanwhile, some of the recent hawkish repricing has occurred alongside a surge in energy prices following geopolitical escalations in the Middle East, with WTI returning above USD 100/bbl.

WALLER: Waller has provided perhaps the clearest reaction function for the upcoming report, signalling support for holding rates steady in September if the August inflation data shows continued progress. Waller remains confident that inflation will fall and said he is finally seeing signs of disinflation, pointing to considerable improvement in three-month core inflation, although inflation remains significantly above the Fed's 2% target. However, he would consider a rate hike if the August metrics come in hot, adding that a small policy adjustment could help ensure progress resumes if the data shows a reversal. In terms of the inflation drivers, Waller argued that elevated energy prices and tariffs are not significant ongoing sources of inflation and that wage growth is consistent with a return to target. Waller was quizzed on a number he would be happy with - he said if the "3-month number gets to 2.8%, that is fine".

Traders will also scrutinise the CPI details for their implications for PCE, which has long been considered the Fed's preferred inflation gauge. However, Waller suggested that headline and core PCE are not necessarily the best guides to the underlying inflation trend, arguing that underlying inflation is "doing better" than the core figures suggest.

Waller's remarks initially saw money markets pare back hawkish bets, returning the probability of a September hike to around 50%. However, last week's strong NFP report and subsequent geopolitical escalation have since helped rebuild hawkish pricing, with markets now assigning around a 70% probability to a 25bp September rate hike.