On the evening of May 15, the United States released its April inflation data. The overall CPI was significantly lower than market expectations, but basically consistent with our forecast, while the core CPI was in line with market expectations, but lower than our forecast. After the data was released, the market as a whole reacted positively, with U.S. bond interest rates falling, U.S. stocks rebounding, the U.S. dollar weakening, and gold strengthening. The expectations of interest rate cuts implied by CME interest rate futures in the market also heated up again, with the probability of a rate cut in September rising to 88%.
The April non-farm payrolls and CPI were both lower than expected, which was in stark contrast to the market's concerns about double inflation and even another rate hike after the two data exceeded expectations a month ago. So, how do we understand the inflation data this time, as well as the recent data released in April, such as PMI and non-farm payrolls, which were lower than expected? Our comments are as follows:
Mainly lower than market expectations was overall inflation. Core inflation was basically in line with market expectations. Overall inflation benefited from the fall in food and gas prices. The overall CPI in April was 0.31% month-on-month and 3.36% year-on-year, which was basically in line with our forecast (0.32% month-on-month and 3.36% year-on-year), lower than market expectations (0.4% month-on-month and 3.4% year-on-year), and dropped significantly from the previous value (month-on-month). 0.38%, 3.48% year-on-year). Core CPI was 0.29% month-on-month and 3.61% year-on-year, which was lower than our forecast (0.36% month-on-month and 3.68% year-on-year). It was basically in line with market expectations (0.3% month-on-month and 3.6% year-on-year). It was also significantly lower than the previous value (0.36% month-on-month). , 3.80% year-on-year). Looking at the items, the overall CPI mainly benefited from the decline in food (-0.20% month-on-month) and gas (-2.86% month-on-month) prices. In the core CPI, rent sub-items fell, with main rents falling rapidly month-on-month (0.35% vs. previous value 0.41%), equivalent rents falling slightly month-on-month (0.42% vs. previous value 0.44%), and medical services falling 0.45% month-on-month (previous value). 0.56%) and car insurance, which clearly disturbed the market last month, also fell slightly from the previous month to 1.76% (previous value: 2.58%).
Why are the recent data "clustered" weak and lower than expected, while a month ago "clustered" exceeded expectations? It is due to the tightness of financial conditions. The April inflation data is another weak data after the April PMI and non-farm data. The retail consumption released tonight is also lower than expected. This is not surprising or "mysterious". It is due to the tightness of financial conditions. The effect of the higher interest rates in the past period has begun to affect demand and prices. The lower interest rates and looser financial conditions at the end of October last year promoted the improvement in demand, which made the US economic data such as employment, inflation and PMI continue to exceed expectations at the beginning of this year. In addition, the sharp rise in commodity prices during the same period not only led to a decline in the expectation of interest rate cuts, but also the voice of interest rate hikes reappeared under the concern of secondary inflation. However, in April, the reflexivity of the higher interest rates gradually emerged. The data of existing home sales, manufacturing PMI, non-farm and retail consumption in March slowed down one after another, and the expectation of interest rate cuts rose again to twice this year (September and December). This phenomenon of unexpected data in both positive and negative directions "clustering" and swinging back and forth is actually not surprising. It is precisely the reflexivity of the tightness of financial conditions that we emphasize ("The U.S. stock market correction will help restart the interest rate cut trade", "The threshold for the Fed's interest rate cut").
After the data was released, the market risk appetite has increased, but there are also some concerns behind the increase in risk appetite, mainly because: 1) The overall inflation is lower than the market expectation, and the more concerned core inflation is basically in line with the market expectation. In addition, the PPI data on May 14 exceeded expectations. This combination is not completely ideal. 2) The current downward interest rate, the rebound of US stocks, and the rise of commodities have made the financial conditions, which have been slightly tightened in the past month due to the postponement of interest rate hike expectations and the rise in interest rates, loosen again. If this continues, we may see an increase in the probability of data exceeding expectations again in one or two months due to the reflexivity of financial conditions, and at the same time, efforts to control inflation will be weakened (for example, the 30-year mortgage rate anchored to the 10-year US Treasury bond rate may fall again, giving rise to a resurgence in real estate demand). Such a "return run" will in turn postpone the expectation of interest rate cuts, suppress the market, and become a replica of the market's excessive and premature expectation of interest rate cuts at the beginning of the year. Therefore, we are worried that such a rebound and excitement may not last long.
The third quarter is the main window for inflation to fall and policy adjustments. The lower-than-expected inflation data this time has apparently raised expectations for rate cuts, but it may not be a "good thing" to do it too early. Judging from the market rhythm this year, the window for policy adjustments and weaker inflation is mainly concentrated in the third quarter, mainly because inflation may rise slightly in the fourth quarter, and there are also election factors in the fourth quarter. In this context, if the interest rate cut transaction is opened too early, it may cause the inflation to fall less than expected in the third quarter, resulting in the third quarter interest rate cut window being missed. If this window is missed, the fourth quarter will face the election and the end-of-year inflation tail, which will be more troublesome for the start of interest rate cuts within the year. In this sense, we are worried about the space and sustainability of the market and asset risk appetite at this position.
