Zhejiang Macro Li Chao: The decline in CPI has boosted the market to continue trading in the short term

Wen | Chief Economist of Zheshang Securities Li Chao / Lin Chengwei

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This month's US CPI growth rate was significantly lower than expected year-on-year, mainly due to the decline in automotive chain prices to pull down the core CPI &; Oil prices pull down non-core items. Looking ahead, we believe that the energy sub-item in the inflation structure may rebound in Q3, but the housing and auto chain sub-item will continue to fall and hedge against the upward pressure on the CPI internally, and the overall trend of the CPI in the United States is expected to continue to decline during the year. The core determinant of short-term interest rate hikes is inflation and non-employment, combined with the inflation situation to maintain the September interest rate hike of 50BP judgment, it is expected that the market will continue to trade the main line of recession in the short term. In terms of large-scale assets, it is expected that the general direction of US Treasury yields will tend to decline &; U.S. stock Q3 completes bottoming&; Persistent hints gold Q3 is an important configuration window.

This month, the year-on-year growth rate of U.S. CPI fell sharply to 8.5%, compared with 9.1% in the previous month; it was flattened at 0% month-on-month and 1.3% in the previous month, and the growth rate was significantly lower than market expectations. The growth rate of core CPI was 5.9% and 0.3% year-on-year, respectively, which was a sharp decline from the previous month. Overall, this month's CPI pullback further confirms the position of the June CPI's intra-year high, and the trend is expected to continue to decline during the year.

From the perspective of core CPI, the growth rate fell sharply to 0.2% (previous value 0.8%) this month, and the decline in auto chain prices was the most prominent contribution, mainly due to the repair of global supply chains after the easing of the epidemic, which was basically consistent with the judgment in the Fed's July interest rate meeting. The growth rates of new cars, used cars and transport services fell sharply back to 0.6%, -0.4% and -0.5% respectively, compared with 0.7%, 1.6% and 2.1% respectively. The rent sub-item growth rate was 0.5% month-on-month, a slight decline from the previous value, judging from the leading relationship of house prices, it is expected that there is still room for downward movement during the year.

From the sub-item outside the core CPI, the decline in oil prices led to a downward trend in the energy sub-item this month -4.6%, which is the largest month-on-month decline in the sub-item since April 2020, mainly related to the sharp decline in oil prices since Q3, and the decline in domestic gasoline prices in the United States has reached -18% since the end of June. Affected by the Russian-Ukrainian conflict, the food sub-item remains relatively resilient, rising by 1.1% month-on-month this month, and the food sub-item is expected to maintain month-on-month growth before the end of the Russian-Ukrainian conflict, and the Minister of Agricultural Policy and Food of Ukraine in July said that "Ukrainian farmers are expected to reduce the sowing of winter food crops by 30% to 60% this year."

After the release of the data, the market as a whole continued to trade the main line of recession, in line with our previous report "The Fed's Tightening Slope Has Crossed the Steepest Slope", the dollar index and 10-year US Treasury interest rate fell sharply, and the nasdaq as a long-term asset futures price jumped sharply.

Looking ahead, we believe that the energy sub-item in the inflation structure may rebound in Q3, but the housing and auto chain sub-item will continue to fall and hedge the upward pressure on the CPI internally, the overall trend of the CPI in the United States is expected to continue to decline during the year, and our previous judgment of the year-end CPI level remains 6.5%-7% year-on-year.

In terms of energy prices, crude oil prices have continued to fall since entering Q3, but in the context of the Russian-Ukrainian war has not yet ended (it is expected to continue Q3, detailed can refer to the previous report), OPEC is still prudent to control the increase in crude oil supply (planned to increase production in September is only 100,000 barrels / day, significantly lower than the expected increase of 300,000 barrels / day) Crude oil supply and demand is still in a tight balance, Q3 energy prices and energy-related CPI sub-items still have a high probability of rebound.

In terms of rent prices, the year-on-year growth rate of the corresponding CPI housing sub-item since entering 2022 has continued to rise, which is an important driving factor for the inflationary pressure in the United States in 2022. U.S. house prices have a leading period of about 12 months for CPI housing sub-items, and according to the leading relationship observation, the year-on-year growth rate of housing sub-items in the second half of 2022 will gradually decline.

In terms of second-hand car prices, the overall price of used cars since 2022 is in a downward trend, and with the repair of the global supply chain, it is expected that prices may continue to fall in the second half of the year, and the overall growth rate will continue to remain negative month-on-month. The above two major sub-items (rent and transportation sub-items together account for more than 40% of the CPI) can form an internal hedge against the potential rebound in energy prices in the US CPI structure in the second half of the year.

Biden's Inflation Reduction Act of 2022 was recently voted through in the Senate and will be sent to the House of Representatives for voting, and is expected to be enacted before the election. The bill, formerly known as Biden's Build Back Better Act, includes tax reform, new energy investment and other fields, and the scale of expenditure has undergone two rounds of sharp reductions, from the initial scale of $3.5 trillion to $1.75 trillion, until the current final version of $433 billion. Bill of Revenue and Expenditure Period 10 Years:

In terms of expenditure, the total scale is $433 billion, which can be divided into $369 billion in energy expenditure (tax credits and car purchase subsidies for various types of new energy investments) and $64 billion in health insurance expenditure (health insurance subsidies).

In terms of revenue, the revenue generated a total of $739 billion in fiscal revenue, which can be divided into three categories: One is to impose a 15% minimum tax on companies with an average revenue of more than $1 billion in three years to increase revenue by $313 billion. The second is to reduce the cost of medical insurance to save $288 billion. The third is to strengthen tax collection and management and improve the tax system of the capital market to increase revenue by 138 billion US dollars. The tax reform does not increase taxes on households and businesses with annual incomes of less than $400,000.

In terms of macro impact, the short-term impact of the bill's revenue and expenditure cycle of up to 10 years is limited, and there is no mitigation effect on short-term inflation. First, short- and long-term inflationary pressures are limited, and according to CBO estimates, the bill is expected to have no impact on inflation in 2022 and between ±0.1% for inflation in 2023. The second is to reduce the potential growth rate of the US economy, according to the Tax Foundation, the 15% minimum tax provision of the bill has a negative effect on the economy, which may reduce the potential growth rate of US GDP by -0.1%.

We pointed out in our previous report" "Is the full employment recession a short-term or long-term phenomenon": "Employment data is only a constraint on the magnitude of interest rate hikes, the core determinant of the rate hike in September is still inflation, there are still July and August inflation data to be released before the September interest rate meeting, and the inflation situation will basically determine the September rate hike after the current Fed 'abandons' forward guidance." If the inflation data in July and August continue to fall, the probability of the Fed raising interest rates by 50BP in September is still large. "The September rate hike in the futures market pricing after the release of this month's CPI data has once again fallen sharply back to around 50BP, confirming our previous judgment."

Considering the current inflation situation, we continue to maintain our previous judgment on the future fed's monetary policy: it is expected to raise interest rates by 50BP in September, and the strength of interest rate hikes may return to 25BP after entering Q4; If the U.S. job market deteriorates more than expected or European debt risks emerge, rate hikes could be paused in Q4. The market will continue to trade along the main recession line in the short term.

In terms of US debt, it is expected to gradually fall back to 2.5%. Looking forward to the end of the year, the Fed's tightening expectations will gradually slow down; Economic data is expected to deteriorate further, against the backdrop of a gradual fall in Us Treasury rates to the 2.5% range; the 10-year 2-year US Treasury yield may continue to invert in the second half of the year. 2.5% as a neutral interest rate level, it is more difficult to break below the 2.5% trend of the 10-year interest rate before the inflation level falls further.

In terms of US stocks, it is expected to complete the bottoming in Q3 and gradually rebound in Q4. With the gradual announcement of short-term U.S. stock second quarter results and the revision of full-year growth forecasts, valuation pressures caused by tightening expectations and profits downwards caused by recession expectations will come to an end. The slowdown in the marginal tightening will boost U.S. stocks, and stylistically we think the NASDAQ will still outperform the Dow.

In terms of the US dollar, the neutral scenario is expected to gradually turn downwards, and may return to around 100 at the end of the year. In the event of a sovereign-debt crisis in Europe, the dollar could turn upwards to continue challenging 110. We have pointed out many times in our previous reports that in the context of the Russian-Ukrainian conflict, the tight energy supply will make Europe face the dual pressures of economic growth and debt risks, and the TPI tool given by the ECB in July is subject to inflation constraints and does not dispel the market's anxiety about debt pressure.

In terms of gold, we believe that Q3 is an important configuration window period, and in the second half of the year, London gold may challenge the previous highs of the year. From the perspective of the potential evolution path of the macro environment in the second half of the year, gold is a large class of assets that we are optimistic about in the second half of the year. If European debt pressures ferment, risk aversion will push gold prices upwards from the experience of 2010; If the European debt problem is resolved smoothly, the decline in real yields on the US dollar and US Treasuries will also be good for gold.

Risk Warning

Pressure on European sovereign debt exceeded expectations; U.S. inflation worsened than expected

This article originated from the financial world