The latest data released showed that the US CPI rose 2.9% year-on-year in July, compared with 3% in the previous month. It has fallen for the fourth consecutive month and is the first time to return to the "2-digit" level since March 2021.
How does the data perform this time?
What impact will it have on the Fed’s future monetary policy? Summary of the latest institutional judgments: CITIC Securities said that the US CPI in July was basically in line with expectations and was a “good data” that was in line with the rules. It once again confirmed the cooling trend of inflation and opened the door for the Fed to cut interest rates in September.
We expect the year-on-year growth rate of US inflation to stabilize and slightly decline this year. We do not believe that the rebound in the month-on-month growth rate of residential items indicates that the cooling trend of rental inflation is about to reverse. We maintain our forecast that the Federal Reserve will cut interest rates two to three times this year.
U.S. Treasuries may have begun to show their investment value, and we can pay attention to the potential for a steepening yield curve. For U.S. stocks, we can pay attention to the performance of the healthcare industry during the risk management-style interest rate cut cycle.
Huatai Securities pointed out that July’s CPI was mixed and had limited impact on the Federal Reserve’s monetary policy. The August non-agricultural data released early next month may have a more significant impact on the extent of interest rate cuts in September. At present, the Fed’s 25bp interest rate cut in September is still A slightly higher probability scenario. From a fundamental perspective, the August non-agricultural data released early next month deserves special attention, including whether the employment data will be revised upward and whether one-time disturbances such as hurricanes will subside.
Under the baseline scenario, if the marginal increase in non-agricultural employment in August recovers and there is no significant fluctuation in the financial market, the probability of a 25bp rate cut in September is still slightly higher. CICC believes that overall, US inflation has made progress on the path of slowing down, which is what the market expects.
From the perspective of sub-items, the month-on-month rebound in inflation in July was mainly driven by rent, indicating that price stickiness still exists and the slowdown in inflation will be slow. We believe that this data supports the Fed's 25 basis point rate cut in September, but does not support a larger rate cut.
Our baseline scenario is that the Fed will cut interest rates by 25 basis points each in September and December. The market's current pricing of rate cuts may be too aggressive.
From this, we can find that the US CP in July returned to 2.9%, better than expected, but the core CPI still reached 3.2%, which was in line with expectations, which reduced the possibility of a sharp interest rate cut in September. Currently, the market expects that the probability of the Fed cutting interest rates by 25 basis points in September is 60%. Now there is another voice. Against the background of Japan's possible no rate hike this year, is it possible that the Fed will still not cut interest rates in September?
In fact, CPI is not particularly important for the Fed to cut interest rates. After all, the Fed’s previous requirement was that CPI drop to 2%, and it is still a long way from 2%. Therefore, the United States still pays the most attention to employment data, which directly focuses on whether the economy is in recession. Therefore, the subsequent labor market report will play a key role. The August non-farm data and weekly initial unemployment claims will be released on September 6!
If the Fed really wants to cut interest rates in September, the non-farm data on September 6th must be relatively bad, so the market is still suspenseful. Of course, we expect the Fed to enter a rate cut cycle in September this year, but can the wish be realized? It depends on how the Fed will act behind the big game? In addition, there is no need to worry about whether the interest rate will be cut by 50 basis points or 25 basis points in September? As long as the interest rate is cut, it is an opportunity in the macro window period of the domestic capital market! After the release of the US July CPI tonight, the US stock market did not rise sharply, but instead rose and fell, which also confirmed from the side that this CPI data cannot play a decisive role in whether the interest rate will be cut or not, and further observation and waiting are needed.
The US CPI data for July showed that inflation levels slowed down, rising 2.9% year-on-year, the first time it has fallen to the "2" digit since March 2021, and the fourth consecutive month of decline, which is in line with market expectations. However, the market's response to this was a decline, mainly due to the following reasons:
1. Expectation adjustment: The market has already expected a cooling of inflation, and the release of CPI data did not bring any new positive factors, causing investors to choose to take profits.
2. Economic recession concerns: Despite the positive CPI data, market concerns about economic recession have not decreased. Financial institutions’ models show that the risk of economic recession has increased, adding to market uncertainty.
3. Technical adjustment: The market may experience a technical correction after a continuous rise, especially when investors are uncertain about the future economic and policy trends.
In summary, the July CPI data paved the way for the September rate cut, and the September rate cut did not exceed expectations. The probability of a 25BP rate cut is 60%. Although the CPI data released a positive signal of slowing inflation, investors are concerned about the uncertainty of the economic outlook and policy changes. Therefore, under the combined effect of expectation adjustments, recession concerns and technical adjustments, the market fell.
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