Data released by the U.S. Bureau of Labor Statistics showed that the U.S. CPI (consumer price index) rose 3.4% year-on-year in April and 0.3% month-on-month; the core CPI rose 3.6% year-on-year and 0.3% month-on-month, basically in line with market expectations.
After five months, the year-on-year growth of the US CPI did not exceed market expectations. After the release of the April inflation data, the market's expectations for the Fed's target interest rate path shifted downward overall. After the data was released, the three major US stock indexes opened higher, the 10-year US Treasury yield fell, and the US dollar index fell.
Inflation levels are declining again, but subsequent trends remain to be seen
Market participants pointed out that the latest inflation data in the United States in April showed that both overall inflation and core inflation have declined again, but whether the US de-inflation process can be achieved relatively smoothly is still full of uncertainty.
Overall, the April CPI data showed that the US inflation level began to decline again, and the process of reducing inflation did not continue to encounter headwinds. From the perspective of the super core service inflation that Federal Reserve Chairman Powell is concerned about, the year-on-year and month-on-month growth rates in April increased by 0.11 percentage points and decreased by 0.23 percentage points respectively compared with March, and the month-on-month growth rate decreased.
Looking ahead, we need to keep a close eye on the downward slope of inflation. In fact, considering the continued high prices of energy and food, it is possible that this will be transmitted to core inflation. After the third quarter, rental inflation may rise, which will lead to a slower decline in core inflation. Therefore, the process of de-inflation in the United States is still full of uncertainty.
In April, the year-on-year growth rate of CPI stabilized as expected, among which the inflationary pressure of food and core commodities has steadily eased, but the energy item is still rising, and the prices of core service items show strong stickiness. On the one hand, the pressure of energy items on inflation is still increasing. On the other hand, the inflation of core services is difficult to reduce, mainly due to the continued increase in automobile insurance costs. However, the owners' equivalent rent and rent items with a larger weight in the core service items continue to slow down year-on-year, and at the same time, the inflationary pressure of food and core commodities is gradually easing. Overall, core inflation is still steadily falling, but affected by the fluctuations in energy prices, it is expected that inflation may remain in a range in the coming months.
The US has made progress in de-inflation in April, but the progress is not large. First, the month-on-month decline in CPI is not large. Second, the owner's equivalent rent, which has increased significantly in the previous period, has only slowed down slightly. In addition, the super core CPI, which the Federal Reserve focuses on, has cooled marginally, but the annualized rate is still at a high level. The month-on-month rebound of the US CPI in the first quarter of this year may be supported by the relaxation of financial conditions in the previous period. The tightening of US financial conditions in the future will help cool down inflation.
Market expectations of a September rate cut by the Federal Reserve increase
According to the "FedWatch" tool of the Chicago Mercantile Exchange Group (CME), after the release of the US CPI data in April, the probability of a rate cut in September increased from 65.1% to 73.2%; the probability of two or more rate cuts in December increased from 56.9% to 68.4%.
Regarding the future trend of the Federal Reserve's monetary policy, some market participants maintain their judgment that the first interest rate cut may take place in the third quarter, but some analysts believe that the Fed's pace of interest rate cuts may be slow, and the first interest rate cut is unlikely to come before September, and it is even possible that there will be no interest rate cut in 2024.
Relatively high inflation may cause the Federal Reserve to maintain high interest rates in the short term, but considering that the impact of high interest rates on various sectors of the economy may gradually become apparent, the first interest rate cut is expected to begin in the third quarter.
Although the weakening of US inflation is not large, the US retail data has consolidated the market's confidence that inflation will further weaken in the future. The market will bring forward the expected start of interest rate cuts to September, and it is expected that there will be two interest rate cuts in 2024.
However, due to the high inflation in the past two months, although inflation weakened in April, the future trend is still not obvious, which is not enough to give the Federal Reserve confidence. It is expected that the Federal Reserve will continue to wait and see.
The decline in inflation data in April is good news for the market, but there is still great uncertainty about the subsequent inflation slope. In addition, the actual wage growth rate is still at a high level, so we believe that it is not appropriate to pay too much attention to and interpret the inflation data for a single month, and its impact on the Fed's policy may be limited.
Judging from the recent remarks of Fed Chairman Powell, although he believes that inflation data will eventually decline, the inflation data in the first quarter has weakened his confidence in rate cuts. The Fed is currently unable to give a decision on whether or when to lower interest rates, and high interest rates may continue. Although the current inflation data shows that the Fed is unlikely to consider raising interest rates as an option for subsequent monetary policy, judging from the recent increase in U.S. residents' inflation expectations, the Fed needs more data to observe the process of de-inflation. Under the baseline scenario, the Fed's first rate cut may be in the fourth quarter of 2024, and it is even possible that there will be no rate cut in 2024.
For all types of assets, the downward trend in US inflation is in line with expectations, which will boost market sentiment in the short term. Looking ahead, as the downward slope of inflation is still uncertain, the market's optimism may face certain correction pressure.
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