On September 14, the CICC research report pointed out that the US CPI in August increased by 8.3% year-on-year, and the core CPI excluding energy food increased by 0.6% month-on-month and 6.3% year-on-year, both higher than expected. While the recent drop in oil prices has had some cooling effect on inflation, other prices continue to soar, keeping core inflation strong. In our view, higher-than-expected inflation could prompt the Fed to raise rates by 75 basis points in September, and it is also “the hard and right thing” to continue raising rates sharply. Regarding the judgment of subsequent inflation, we reiterate our previous opinion: this round of US inflation is supported by two “spirals”, which is relatively stubborn, and the year-on-year growth rate of core CPI may not return to 2% before the end of 2024. In order to combat inflation, the Fed may raise interest rates to 4~4.5%. After that, it will not raise interest rates significantly, but it will not cut interest rates soon. The US monetary policy will remain tight. For the capital market, the “double killing of stocks and bonds” in the United States may not end, the dollar may remain strong, and we may still be a long way from the “market bottom.
The following are its latest views:
Ahead of the August inflation data, a weak reading was widely expected, as lower oil prices would weigh on inflation. The result, however, was that the drag from lower oil prices was not enough to offset increases in other prices, leaving inflation looking strong. Specifically:
1) The sharp drop in oil prices was expected, but the strong performance of natural gas and electricity prices offset the impact of the drop in oil prices. Since August, the retail price of gasoline in the United States has continued to decline, driving the gasoline price in the CPI to drop by 10.6% month-on-month. On the other hand, electricity prices rose by 1.5% month-on-month in August, the fourth consecutive month that the month-on-month growth rate was above 1%. The price of natural gas also reversed the trend of falling last month and turned to rise, driving the natural gas sub-item in the CPI to rise by 3.5% month-on-month.
2) Rent prices are still firm, and the rental market doesn’t seem to show signs of cooling down. The month-on-month increase in landlord equivalent rent (0.7%) and primary residence rent (0.7%) remained high in August. As the two contributed more than 30% to the weight of the CPI basket, their continued price increases provided strong support for inflation. The price of hotel accommodation was unchanged from the previous month (0%), partly reflecting the impact of slowing demand for going out after the peak tourist season.
3) The price of new cars is still rising, and the impact of falling air ticket prices is relatively limited. In August, the new car price index rose 0.8% month-on-month, reflecting consumer demand for cars. Used car prices fell by 0.1% month-on-month, which may reflect the “drainage” effect brought about by the recovery of new car supply rather than weakening demand. Although air ticket prices continued to fall in August (-4.6%), the transportation service price index rose 0.5% month-on-month, indicating that other than air tickets, there was still demand for other outings.
Inflation exceeds expectations again, what will the Fed do? We think a direct impact is that the Fed will announce a 75bps rate hike in September by the FOMC, which will raise the federal funds rate range to 3% to 3.25%. It is worth noting that after the release of the inflation data, the market also discussed a 100 basis point interest rate hike in September [1]. We think there is some truth to this idea, but it is premature and needs other stronger and more convincing data to support it, such as August retail sales data released this Thursday, September University of Michigan consumer data released on Friday inflation expectations, etc. In addition, because the Fed will hold an interest rate meeting next week, this week is a quiet period, and Fed officials cannot communicate their ideas with the market. It also takes more courage to temporarily change the rate of interest rate hikes.
Regarding the subsequent inflation trend, we reiterate the view of “inflation stubbornness”: we believe that this round of US inflation is relatively sticky, because it is supported by two “spirals” at the same time. The second is the “profit-inflation” spiral brought about by the increase in the concentration of American industries and the increase in corporate pricing power. Under the action of the two spirals, the persistence of U.S. inflation has been enhanced. In order for the Fed to control inflation, it needs to break the two positive feedbacks, which requires more intense and longer-lasting monetary tightening than before. In this regard, Powell’s speech at the Jackson Hole meeting has already stated his attitude that it will be “the hard and the right thing” to carry out interest rate hikes to the end.
Quantitatively, our model shows that the year-on-year growth rate of the core CPI in the United States may be difficult to return to 2% by the end of 2024. In order to curb inflation, the Federal Reserve may need to raise interest rates to 4-4.5% from the end of this year to the beginning of next year, and will not raise interest rates significantly after that, because if interest rates are raised too aggressively, it may greatly increase the pressure on US government debt repayment. unbearable weight”. But it won’t cut rates anytime soon, as cutting rates too early could repeat the mistakes of the 1970s and trigger runaway inflation, a “mistake not to make again.” Taken together, we expect the U.S. monetary policy to remain tight in the next 6-12 months.
For the capital market, we once again remind the risk of “double killing of stocks and debts” in the United States: according to historical experience, the final outcome of this round of the US economic downturn may be a “stagflationary” recession. The main contradiction of this type of recession is inflation, not deflation, and even if it enters a recession, the Fed may not cut interest rates anytime soon. The result is that US bond yields peaked later, US stocks took longer to “grind”, and the dollar remained strong. If we refer to history, we believe that the “double killing of stocks and bonds” in the United States may not end, and there is still a long way to go before the “market bottom”. After the release of U.S. inflation data, the three major U.S. stock indexes fell sharply, U.S. bond yields jumped, and the dollar rebounded. Such performance is consistent with our judgment, and this may also be the “new normal” of the US capital market for some time to come.