The U.S. CPI in August was basically in line with expectations. The year-on-year growth rate of the overall CPI dropped from the previous value of 2.9% to 2.5% as expected, and the month-on-month growth rate remained at 0.2% as expected. The year-on-year growth rate of the core CPI was unchanged at 3.2% as expected, and the month-on-month growth rate rebounded from the previous value of 0.2% to 0.3% (expected to remain unchanged at 0.2%).
▍U.S. prices were generally stable in August, but core inflation had flaws, reducing the probability of the Federal Reserve immediately and quickly cutting interest rates.
This CPI report as a whole continues the "normal" tone of the previous report. The overall CPI year-on-year growth rate narrowed by 0.4ppts due to the base effect. The reading is the lowest since February 2021, indicating that US prices have generally stabilized, but rental inflation stickiness still exists. Specifically:
1) The year-on-year growth rate of food items decreased by 0.1ppts from the previous value to 2.1%. Among them, the year-on-year growth rates of household food items and dining out items narrowed by 0.2ppts and 0.1ppts from the previous value to 0.9% and 4.0%, respectively, which once again confirmed the stable environment of retail food prices in the United States.
2) Energy prices fell by 0.8% month-on-month after seasonal adjustment (previous value was zero growth), mainly due to the 0.6% month-on-month drop in gasoline prices after seasonal adjustment (down 2.7% month-on-month before seasonal adjustment). Electricity and natural gas prices also fell month-on-month after seasonal adjustment, with decreases of 0.7% and 1.9% respectively.
3) The year-on-year decline in core commodity prices remained unchanged at 1.9%, reflecting that the supply and demand pattern has been fully eased and the recent increase in shipping prices has not significantly disturbed its cooling process. The prices of education and communication products, home furnishings, transportation products, medical care products, and leisure products fell by 0.4%, 0.3%, 0.3%, 0.2%, and 0.2% month-on-month respectively after seasonal adjustment (new car prices among transportation products were zero growth and used car prices fell by 1.0% month-on-month), while clothing prices rose by 0.3% after seasonal adjustment.
4) The year-on-year growth of the housing item (shelter) rebounded from the previous value of 5.1% to 5.2%, and further increased from the previous value of 0.38% to 0.52% month-on-month, contributing to the 23.8bps month-on-month increase in the core CPI, which was the main reason and main flaw for the CPI report to exceed expectations. The rent of primary residence (RPR) fell from 0.49% to 0.37% month-on-month, but the owner’s equivalent rent (OER) rebounded from the previous value of 0.36% to 0.50% month-on-month, and the month-on-month growth rate of away-from-home accommodation, which was more volatile, also increased from the previous value of 0.2% to 1.8% in August.
5) The year-on-year growth rate of core services (ex-shelter) other than housing further dropped from the previous value of 4.7% to 4.5%, and the month-on-month growth rate was a tepid 0.24%, indicating that the labor market has no longer significantly boosted service inflation after the rebalancing process, which is a relatively positive signal. Among the main sub-items, health care services fell 0.1% month-on-month after seasonal adjustment, air ticket prices rose from the previous value of -1.6% to +3.9% after seasonal adjustment, and the month-on-month increase in auto insurance prices narrowed from the previous value of 1.2% to 0.6%.
▍It is expected that US inflation will remain roughly stable year-on-year this year, and the cooling trend in rental inflation will not be reversed.
First, as the Beige Book released by the Federal Reserve on September 4 said, consumer spending in most parts of the United States has "ticked down" recently (the previous report used the wording of "roughly stable little changed"), employers' hiring behavior has become more cautious, wage pressure has weakened, and the increase in non-labor production costs has "moderately moderated", which may mean that the ability and necessity of companies to raise prices have weakened. Secondly, the tight supply of rental housing in the United States has not intensified. The more forward-looking new tenants' repeat rent and Zillow's rent index year-on-year both indicate that there is still room for the housing CPI to fall further year-on-year. We still believe that the trend of cooling rental inflation is not about to reverse. Finally, the U.S. Energy Information Administration (EIA) expects that regular retail gasoline prices will continue to fall in the next four months (the decline in September and October will exceed seasonality). The current crude oil futures price curve also indicates that in the context of strong uncertainty in the global demand outlook, energy prices may perform relatively weakly in the next year, so the energy item is unlikely to cause a sharp rebound in overall inflation readings.
▍The election debate has eased market concerns about the risk of "re-inflation" in the United States next year.
Preliminary polls after the US presidential debate this week showed that Harris had a slight advantage, which should ease the market's previous concerns that Trump's proposals on immigration and tariffs might reignite inflation (we previously estimated that if Trump's new tariff ideas were implemented to the letter, the growth rate of the US PCE price deflator might rise by as much as 2.1 percentage points, please see "Comment on the US CPI in June 2024 - Inflation welcomes another cooling news, and stickiness gradually shows signs of fading" 2024-07-12). In his policy platform "A New Way Forward", Harris proposed that if elected, he would build three million new rental units and houses during his term, provide a $25,000 down payment subsidy for first-time homebuyers, and legally limit rent increases. If his plan comes true, this may increase housing supply from next year, attract potential tenants to buy houses, and divert rental demand, thereby prompting rental inflation to return to the long-term center.
▍Maintain the forecast that the Federal Reserve will cut interest rates three times this year, each time by 25bps.
Against the backdrop of slowing inflation but with flaws and cooling employment but with resilience, the Fed is still in a "risk management" rather than "crisis response" decision-making framework. While protecting the labor market, it also needs to take into account the still sticky price environment and minimize the risk of inflation returning. In summary, we believe that the Fed has the conditions to cut interest rates and reduce the restrictiveness of the current policy, but there is no need to rush to cut interest rates quickly. We maintain the forecast of three interest rate cuts this year, each of 25bps (see "Comments on the US Non-Farm Data in August 2024 - How to View the Lukewarm Non-Farm Data and "Front-Loading Rate Cuts"" 2024-09-08). You can pay attention to the dot plot and economic forecast released by the FOMC meeting next week.
▍Recently, the market has been more sensitive to growth data and less responsive to inflation data amid the backdrop of easing inflation. In terms of asset allocation, attention can be paid to the allocation opportunities of short-term U.S. Treasuries and defensive U.S. stocks.
The recent decline in the yield of 10-year US Treasury bonds has been driven by real interest rates. The market is more sensitive to growth data and less responsive to inflation data in the context of easing inflation. This may be one of the reasons why US stocks fell within two hours after the release of this CPI data and US Treasury yields jumped and then fell rapidly. We believe that we may pay more attention to structural opportunities in asset allocation in the near future. As far as US Treasury bonds are concerned, the easing of inflationary pressure and the warming of the "Harris Trade" may consolidate the expectation of interest rate cuts. At the same time, although there are signs of slowing economic growth momentum, it is still resilient, so the downward potential of short-term bond yields may be greater than that of long-term bonds. As far as US stocks are concerned, the market's concerns about the growth momentum of the United States seem difficult to reverse in the short term, and defensive sector allocation opportunities can be considered. At the same time, the start of the interest rate cut cycle usually means a gradual reduction in corporate financing burdens, which may be more beneficial to the healthcare industry, which has both capital-intensive attributes, defensive characteristics and ample free cash flow. Experience has shown that the healthcare industry has performed well in the process of risk management interest rate cuts (please see "U.S. Stock Strategy Special—The Logic of Current U.S. Stock Trading" 2024-08-12).
▍Risk factors:
The momentum of U.S. economic growth is weaker than expected; the growth rate of U.S. job market demand and wages is weaker than expected; the tightness of U.S. financial conditions is less than expected; the unexpected impact of events such as the U.S. election is greater than expected; and changes in market liquidity or sentiment are greater than expected.
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