The desk emphasizes the significance of the recent US inflation data as a pivotal influence on rates markets, suggesting a nuanced read on the economic landscape. Per the full note from J.P. Morgan, Harry Downie and Abiel Reinhart explore the implications of inflation metrics recorded in September, which are critical in steering market expectations for central bank actions. This data suggests a persistent inflationary environment, compelling market participants to reassess their outlook on monetary policy. With a central tendency towards greater rate stability expected, traders must navigate through potential volatility ahead of key economic indicators that could impact positioning further.
What the desk is arguing
The latest US inflation data is poised to play a crucial role in shaping rates markets as we approach year-end. According to the analysis shared by J.P. Morgan, persistent inflationary pressures necessitate a reevaluation of potential central bank moves. The details discussed in the podcast shed light on how inflation trends influence investor sentiment right before what might be pivotal market adjustments.
Furthermore, the implications of the inflation numbers are underscored by their consistency with broader economic indicators, suggesting that the Federal Reserve could maintain or subtly adjust its hawkish stance. Data from other periods this year suggests that inflation rates may not revert strongly, keeping long-term rates under pressure.
Where it sits in our coverage
As per our consensus, we target USD rates at 1.075, estimating a reasonable range between 1.04 and 1.12. Notably, some significant firm targets for December 2026 are:
This perspective aligns with jpmorgan, suggesting that while there is upward room in targets, bofa represents a more conservative outlook, leaning towards a lower range expectation.
How other firms see it
The sentiment among aligned firms like jpmorgan leans towards a stable upward trajectory for rates, reflecting confidence in the continued necessity of hawkish measures by the Fed. Conversely, bofa provides a contrarian view, anticipating lower rates in response to potential economic slowdown metrics.
Market participants should monitor the USD/CAD dynamics, as the trajectory could echo Fed policy shifts affected by inflation data. Changes in labor market conditions or consumer spending will be critical counterweights that impact market volatility moving forward.
01Recent inflation data is critical for shaping market expectations.
02The Fed may remain hawkish in light of persistent inflation.
03Market positioning shifts ahead of further economic data releases.
04Diverging views between firms suggest varied strategies.
Market implications
Watch for sustained momentum around the 1.075 mark as a potential pivot for future positioning. Inflation data releases could catalyze shifts in expectations, necessitating close monitoring of Fed communications in the coming weeks.
Risks to this view
A significant reduction in inflation trends or unexpected economic data releases could compel the Fed to adjust its policy trajectory, invalidating the current bullish outlook on rates. Additionally, global economic shocks or geopolitical events might diverge market expectations significantly, warranting reevaluation.
Hi, and welcome to At Any Rate, J.P. Morgan's global research podcast, where we take a look at some of the drivers behind the biggest trends and themes across fixed income, currencies and commodities markets. My name is Harry Downey.
I'm from our U.S. rates strategy team. And today I am joined by Abigail Reindhart from our U.S. economics team, which is timely as today we just received data from the BLS on how consumer prices rose through the month of August here in the U.S. The inflation data, which strips out the volatile food and energy categories, came in at 0.29 percent on the month, firmer than consensus expectations, which around 0.2, and the pricing we saw inflation markets, which was around 0.25.
Abigail, I'll kick it over to you first. What was your high level read on the data? Thanks, Harry.
So my high level read on the data, as you noted, inflation a little bit firmer than expected. There was one surprising component in the data, telephone prices, or I should say cell phone service plans, which added about a tenth to core CPI to core CPI was up 0.29 on month on month, leaves the over a year ago rate at 2.4 percent. We had been expecting a number closer to a clean two tenths there, so somewhat above our expectations.
The cell phone service increase there that we had, that was kind of the big outlier and surprised. Everything else, a little bit more in line with expectations, but of course, you could say that once you take out the things that are surprised, everything's in line with expectations. So we have to look at that as well.
And it does highlight that inflation is running, continuing to run a bit firmer than the Fed would like. I think on CPI, you could say that CPI over a year ago, 2.4 percent. That's not that bad.
As Chairman Warsh has talked about, what's the number to the left of the decimal point? And I think at 2.4 in isolation, you wouldn't be too concerned, but we're still likely having reasonably above target inflation on the core PC deflator. We think that will rise on an over a year ago basis in August at a 3.3 percent rate.
So continuing to be quite a bit higher than the CPI number. And if our forecast is right, that number will stay in that 3.3 percent range through the end of the year. And that is inclusive of some methodological revisions that the Bureau of Economic Analysis is making to PC.
Those will probably take off perhaps two-tenths of a percent. And so, you know, again, even with that, you're ending up with core PC inflation here, which is considerably above target, not really going down, again, in our forecast. And consequently, on the back of that, we have changed some of our thinking about the Fed, which I think you're going to ask me about.
Yes, absolutely. Thinking about the surprise this month, particularly in CPI data and that surprise we received in telephone services, how durable do you think that is? Do you think we got much of a read from this August print into the trend of inflation going forward?
So there are a couple of things that leapt out at me as we think about the pieces going forward. First, for September in isolation, that's likely now to be a soft month. The telephone item, while some of that could reflect some increases actually in service plan prices that have to do with a more expensive cost of telephone hardware off the back of higher memory prices, there's also a pretty decent chance that this is just complete noise.
The BLS has switched to a new methodology for measuring cell phone service plans last year. And ever since then, we've seen a number of unusual spikes. And so if this spike were to reverse next month, you could get a pretty soft reading on the CPI.
And that's what we've baked into our forecasts. So that's just the near term. What else stands out to me on core goods?
So we had one of our pieces of our forecast is that we would see some renewed acceleration in core goods inflation into the end of the year, in part because technology prices are firming again off the back of those memory price increases. You continue to have supply chain stress measures be pretty elevated. And you may have a little bit of renewed pickup in some tariffs through the end of the year.
Through the middle part of the year, we hadn't seen that. You had actually seen goods prices decelerating and outright declining. In some instances, as tariffs had come off a bit.
But that is reaccelerated now. We've had positive price increases for goods over the last couple of months. And so that is more of an upside source of inflation risk now.
The other thing that jumped out then was on services, we actually continue to get reasonably mild services, again, away from that increase in cell phone prices. Not exceptionally slow, but not exceptionally fast. In particular, shelter components have been running fairly mild.
We've also seen a slowdown in medical care, a little bit of a slowdown in medical care inflation. So there is some softness in services away from that one time spike that we had. Great.
And that's similar to the read through we're getting through from global data with weaker services but firmer goods pricing. And it's also similar to the read through we got from the PPI data yesterday. But thinking about all that together, trend inflation, maybe some upside surprise.
So still firmly above what the Fed would consider their target. How is that impacting your team's view on Fed and bear pricing? Yeah.
So we have changed our Fed call today. We had expected a hike, a first hike, an only hike at the December meeting. We've changed that now to expect two hikes this year, one at next week's meeting, and then the second in December.
And there certainly could be a risk that if inflation were to stay hot, you could see further hikes beyond that. Or you could see that being in the cycle, I think, if some of the inflation readings come in more benign over the remainder of the year. Although markets are pricing in a very strong chance of a Fed hike next week, I think latest market pricing has around an 85 percent chance.
We do think it's a close call. You had, although Chairman Warsh has talked about inflation being too high and perhaps a need to act, given that there were a couple of speakers, New York Fed President Williams, Governor Waller, the other week, who both made a case for why inflation could moderate over time. Pieces of those, and I think the pieces of their story do remain intact.
And the other item is that people could argue that while the August number on inflation that we just had was firm and above expectations, that just given that there was so much in that cell phone move and that might reverse in September, that they might discount that a little bit. I think just going beyond the noise, though, on the month-to-month numbers, again, we are looking for core inflation, core PC inflation to be around 3.3, both in August and going forward. So staring past through some of that noise, just really sort of above-targeted inflation.
And that's what we do expect to ultimately lead the Fed into a hiking, a short hiking cycle here. We do expect the vote also to be unanimous. In the event that they do not hike, we would expect that there's going to be three dissents for a hike, as there was at the prior meeting.
So yeah, those are my sort of key thoughts on inflation and the Fed. I want to turn it back to you and ask you a little bit about what's happening with inflation pricing. So while the reading for overall prices in August was in line with consensus and actually weaker in the inflation markets, how does that impact inflation pricing?
Thanks. Yeah, you're right. Unlike the economist community, which focuses mainly on core prices, the inflation market, inflation swaps and tips are priced off of the headline non-seasonally adjusted index.
And for that index, we actually had a softer read than was expected by inflation markets. And that's important because now this has been the 14th print in the last 18, where this reading has surprised to the downside. We also have an index which tracks inflation data surprises, which are relevant to the inflation market.
And that is in its lowest 10% of readings in the last 10 years. So we've had very weak incoming data for overall inflation pricing here in the break-even market over the near term. And that mirrors some of what you're saying over the near term impact and read through from this print, where if you strip out the more volatile telephone services component, then the reading from this print was slightly more dovish at 19 basis points month over month.
And you'd have maybe a slightly more dovish reading going into the next print for September. And so we think that will continue to be a headwind for inflation pricing, particularly in the context of a hiking Fed, as you've just changed your call to a Fed which is hiking both in September and December. That's probably the most negative scenario you can get for break-even markets, where the near term read of inflation data is slightly weaker.
But you've also got a Federal Reserve, which is likely to increase interest rates and be slightly firmer. As such, we've got a bias towards narrowing in the inflation markets. Great.
And, you know, you mentioned commodity prices. We've got commodity prices up. Crude oil is up about $10 versus the end of last week.
And so we're in really the third of a series of commodity price increases here. How do you think that's impacting inflation markets going forward? Yeah, we've actually seen a premium be added into inflation markets.
Inflation pricing is obviously not just the forward path of inflation. It also takes into account premiums, which can come from liquidity as well as risk around inflation. We've seen that rise and continue to be built as we've gone through this conflict.
Initially when the conflict started, you saw little premium built into the forward inflation curve. But as with much of the inflation community, we're expecting this to be a short conflict. Whereas in the second and third rise we've seen in global commodity prices, you've started to see the inflation curve shift higher, particularly in the forward curve.
When you look out to the 5-year, 5-year point or the 2-year, 3-year point, now these aren't high levels historically, but these are starting to build parts of a premium around that pricing. So much so that on a 1-year, 1-year basis and 2-year, 3-year basis, we're pricing close to 2.6% for CPI, which is above most consensus forecasts for where CPI will land. As such, we think that makes the market more susceptible to downward pressure and narrowing and break-evens because as time goes on, either from this conflict and the lack of focus on it or from an eventual reopening of the straights, we think commodity price risk should be priced out of that market gradually over the medium term, which is another reason why we have a narrowing bias in our view at the moment.
That's good. Yeah. What you say about commodity price risk being priced out of the market over time, I feel that's been, that's a central part of the discussion every day for us for the last six months now.
We'll see. We'll see where that happens. Maybe just to wrap it up, just tell us your overall sort of big picture views here and latest view on the inflation markets.
Yeah. I mean, I've touched on it a couple of times. We were obviously biased towards the moving narrow, one because of the weak read of the near-term data, even though we have a slightly firmer view of inflation, more medium-term, two because we have a Fed which is now hiking into that weaker read, three because we have crazy prices where we believe the risks are skewed towards the downside and a premium coming out of the inflation market.
But fourth and the final one is positioning. We think inflation market positioning has become slightly more stretched. We've seen our monitor of tips fund manager positioning move the most short it has been for tips over the last one year period.
We've also seen a number of consecutive weeks of inflows to the tips asset class, particularly over summer and into September, which is seasonally the worst time for tips given the seasonal patterns of CPI and the weakness you get in the late summer into the end of the year. And as such, we've seen increased flow of less traditional investors in the asset class, which sets up break-evens to larger moves to the downside than the upside if that was to unwind. And I think that's a great place for us to stop.
Thank you all for listening. Stay tuned for more updates on the fixed income space here at the At Any Rate podcast, JPMorgan's global research podcast series. This communication is provided for information purposes only.
Please read the JPMorgan research reports related to its content. For more information, including important disclosures, copyright 2026, JPMorgan Chasement Co., all rights reserved. This episode was recorded on September 11th, 2026.