Although Federal Reserve Chairman Powell's testimony during the two-day trip to Capitol Hill this week has shown a more dovish side, and the S&P 500 index has also closed at its 37th record high this year, leading US stock investors to "keep on playing the music and dancing". However, for many cross-asset investors, it may not be too exciting at the moment: at least the bond market, foreign exchange market and commodity market have not been very active in the past few days...
This has caused many Wall Street traders to shift their focus in advance to the US June CPI data to be released at 20:30 tonight - will this CPI data completely ignite the Fed's expectations of a rate cut? Will the rise in global risk assets add fuel to the fire tonight?
Santander analyst Stephen Stanley said the U.S. core CPI annual rate in June may accelerate to 3.5%, up from 3.4% in May. A survey by the Wall Street Journal showed that the general expectation for this data was 3.4%. If Stanley's forecast is correct, that is, the core CPI annual rate reaches 3.5%, it will be disappointing but not a disaster, and will not completely prevent the Federal Reserve from making one or two interest rate cuts later this year. He said that if the data unexpectedly rises, it will have an adverse impact on the Fed's decision to cut interest rates in September. Stanley has said in the past that a rate cut in September is unlikely due to the approaching election, and the market has basically digested this.
[Today's key financial data and events] Thursday, July 11, 2024
① To be determined: A new round of price adjustment window will be opened for domestic refined oil products
② 07:30 Fed Governor Cook delivers a speech
③ 14:00 Final value of German CPI monthly rate in June
④ 14:00 UK GDP monthly rate for the three months of May
⑤ 14:00 UK manufacturing output monthly rate in May
⑥ 14:00 UK seasonally adjusted goods trade account for May
⑦ 14:00 UK May industrial output monthly rate
⑧ 16:00 IEA releases monthly crude oil market report
⑨ 20:30 US June unadjusted CPI annual rate
⑩ 20:30 US June seasonally adjusted CPI monthly rate
⑪ 20:30 US June seasonally adjusted core CPI monthly rate
⑫ 20:30 US June unadjusted core CPI annual rate
⑬ 20:30 Number of initial jobless claims in the United States for the week ending July 6
⑭ 22:30 U.S. EIA natural gas inventory for the week ending July 5
⑮ 23:15 Fed Chairman Bostic participates in a Q&A session
⑯ 01:00 the next day, Federal Reserve Chairman Moussallem delivered a speech on the economy
What are the market expectations for tonight’s CPI data?
According to the median of the median survey of institutional economists, among the four key month-on-month and year-on-year indicators of the US June CPI data tonight, the month-on-month and year-on-year growth rates of the core indicators are expected to remain the same as last month, while the year-on-year and month-on-month growth rates of the overall indicators may increase or decrease compared with last month. The detailed estimates are as follows:
Note: The blue line is the annual rate of CPI, and the black line is the annual rate of core CPI
The U.S. CPI annual rate in June is expected to increase by 3.1% year-on-year, compared with 3.3% in the previous month.
The monthly rate of US CPI in June is expected to increase by 0.1% month-on-month, compared with 0% in the previous month.
The U.S. core CPI annual rate in June is expected to be 3.4% year-on-year, compared with 3.4% in the previous month.
The U.S. core CPI monthly rate is expected to increase by 0.2% month-on-month in June, compared with 0.2% in the previous period.
The figure below is a detailed summary of the forecast figures of major Wall Street banks by Nick Timiraos, a famous reporter known as the "New Federal Reserve News Agency".
Although the differences between the actual performance and expectations of the above four indicators may affect the market trend tonight, if we must pick out the most critical one, most market participants may be most concerned about the month-on-month performance of the core CPI. Prior to this, the month-on-month performance of the US core CPI has been lower than market expectations twice in a row. Will it happen for the third time tonight?
In fact, in terms of the core CPI month-on-month index, the difference in the forecast range of Wall Street institutions is actually very small - all statistical forecasts fall between 0.1% and 0.3%. And this 0.1 percentage point difference is likely to determine the direction of tonight's market.
Which prices will fall in June? Which will remain strong?
Let's take a look at the data in detail. The reason for the large gap between US core CPI inflation and overall inflation in May was that energy prices fell 2.0% that month. In contrast, the decline in energy prices in June was limited, so it is unlikely that we will see a similar large gap again. So, what are the potential highlights of the June inflation report worth paying attention to?
Let's take a look at Goldman Sachs' forecast. Overall, Goldman Sachs's estimates for the above four main indicators are consistent with the current market mainstream forecasts (I will not elaborate on them here). Of course, Goldman Sachs also highlighted the changing trends of the three key core inflation components that we expect to see in this month's report.
First, used car prices are expected to fall 1.6% month-on-month, reflecting the continued decline in auction prices. US used car auction prices are now 28% lower than their peak, while used car prices, which are part of the CPI data, have only fallen 16%, suggesting that the CPI indicator in this report has further room to fall. At the same time, new car prices are expected to rebound - up about 0.2% (-0.5% in May) to reflect the impact of dealer software system outages and reduced promotional offers that month.
Secondly, Goldman Sachs believes that auto insurance prices are expected to rise again in June, but the increase will not be as fast as at the beginning of the year - the bank predicts that the increase in auto insurance will be 0.5%, while the average increase so far in 2024 is 1.3%. Goldman Sachs believes that rising car prices, rising repair costs, and rising medical and litigation costs have put pressure on insurance companies to increase prices, but the premiums are passed on to consumers with a long lag, partly because insurance companies must negotiate price increases with state regulators.
Third, Goldman expects housing inflation to slow from last month as the gap between new and renewed leases continues to narrow - rents are expected to rise 0.36% and OER to rise 0.39%. Goldman also said that rent growth for single-family homes will be slightly stronger in the future, which may cause OER to continue to exceed rents in the CPI composition. Goldman expects overall housing inflation to run at a climbing rate of about 0.34% per month by December 2024 (reflecting rent inflation of 0.26% and OER of 0.37%).
How is the market doing when the CPI data is released?
Before the release of CPI data tonight, the U.S. stock and bond markets are welcoming the arrival of this key economic indicator with a relatively strong attitude. After the release of the testimony speech by Federal Reserve Chairman Powell this week, the expectation of the Federal Reserve's interest rate cut in September has further heated up.
On Wednesday, all three major U.S. stock indexes rose by more than 1%. The S&P 500 index broke through 5,600 points for the first time in history, setting its 37th record closing high this year.
Note: Number of times the S&P 500 hit new highs each year over the past 95 years
Judging from the pricing in the interest rate futures market, according to the CME FedWatch tool, the possibility of the Federal Reserve cutting interest rates by 25 basis points in September has risen from about 70% on Tuesday to 73.3% overnight. Before the end of the year, the Federal Reserve is also expected to cut interest rates for the second time this year.
Of course, whether the window for the first drop in September can really be locked, tonight's data is still critical, so today's market volatility is likely to be large. As shown in the figure below, since the beginning of this year, the average volatility of US stocks on the day of CPI announcement has been as high as 0.9%, almost twice the average daily volatility of the S&P 500 index as of last Friday (0.5%).
The options market has actually been well prepared for tonight's big market. The volatility curve of the S&P 500 index shows that the ultra-short-term volatility (covering tonight's CPI data) is close to a rare 16!
How will tonight’s data affect market performance?
We have previously introduced that Andrew Tyler, head of U.S. market intelligence at JPMorgan Chase, has deduced four possible scenarios for U.S. stocks after tonight's CPI data, as follows:
① If the U.S. core CPI rises by more than 0.3% month-on-month in June, it means that U.S. inflation is returning and the possibility of the Fed cutting interest rates is weakened, which may trigger a sell-off in risky assets and the S&P 500 will fall by 1.25% to 2.5% - but he believes that the probability of this happening is only 2.5%.
② If the U.S. core CPI rises between 0.15% and 0.20% month-on-month, which is also the most likely scenario that Taylor's team believes, the S&P 500 is expected to rise by 0.5% to 1%.
③If the U.S. core CPI rises between 0.20% and 0.25% month-on-month, U.S. stocks may initially react negatively, but falling bond yields will ultimately support the stock market, pushing the S&P 500 index up 0.25% to 0.75% in the end.
④ The most optimistic scenario is that the month-on-month increase in the U.S. core CPI in June is below 0.1%. This situation will be extremely beneficial to the U.S. stock market and may even prompt some people to call for an early interest rate cut in July, and may drive the S&P 500 index up 1% to 1.75%.
In this regard, Goldman Sachs also has its own scenario forecasts, which investors can cross-reference with JPMorgan's forecasts.
Note: The left side shows the month-on-month data of core CPI, and the right side shows the change of S&P 500
1. Federal Reserve Chairman Powell testified before Congress on Tuesday that inflation is still higher than the Fed's 2% target, but has been improving in recent months, and more good data will strengthen the central bank's case for cutting interest rates.
2. Market focus shifted to the US CPI and PPI data released on Thursday and Friday respectively. Recent data showed that US inflation has fallen from its unexpected high at the beginning of the year.
●FPG fortune prime global analyst views:
FPG special analyst (Felix)'s opinion:
Recent U.S. economic data showed a weak labor market, solidifying expectations that the U.S. central bank will soon begin cutting interest rates. Expectations that the Fed is likely to start cutting interest rates as early as September have a positive impact on current market conditions. However, Fed Chairman Powell testified to Congress on Tuesday that inflation remains above the Fed's 2% target, but has been improving in recent months, and more good data will strengthen the central bank's case for rate cuts. However, if the market sees evidence that U.S. inflation remains stubborn, this could cause precious metals to give up recent gains.
FPG special analyst (chad) opinion:
Investors had been hoping for more concrete details of the Fed's rate cut, and Powell's muted response should have sent gold prices lower. The reason is that a delay in rate cuts could mean borrowing costs remain high for longer - which is bad for gold because it keeps the opportunity cost of holding precious metals high. Gold is a non-interest-bearing asset, making it less attractive to investors if they can earn higher interest elsewhere.
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