The US CPI is lower than expected, and the Federal Reserve may cut interest rates twice next year, what will be the impact on global assets?

On November 14, the U.S. Bureau of Labor Statistics released data showing that the U.S. non-seasonally adjusted CPI rose by 3.2% year-on-year in October, a new low since July this year, with an expected increase of 3.3% and a previous increase of 3.7%; After the announcement, the dollar index dived about 50 points in the short term and is now at 104.38.

The U.S. 10-year Treasury yield fell sharply to about 4.483%, the U.S. 2-year Treasury yield fell 14 basis points to 4.89%, and the U.S. 2-year and 10-year Treasury yields inverted by about 39.6 basis points. Industry insiders said that Fed officials said last week that they would keep the possibility of continuing to tighten in the future, but the October inflation data fell more than expected, and the Fed has no reason to remain hawkish.

Affected by the unexpected decline in the US CPI data, to a certain extent, it also boosted the market sentiment of A-shares, and on November 14, the Shanghai and Shenzhen indices fluctuated moderately, with a full-day turnover of 896.22 billion yuan, a slight increase from the previous month. In early trading, the brokerage sector as a whole moved, with CICC and China Galaxy rising sharply, driving the brokerage sector to rise collectively, but then they all fell to varying degrees. At the same time, Huawei Hongmeng, lithography machines, memory chips and other sectors are more active.

US CPI for October came in lower than expected

According to data released by the U.S. Bureau of Labor Statistics on November 14, the US CPI increased by 3.2% year-on-year in October, slightly lower than market expectations, the previous value was 3.7%, the core CPI in October increased by 4.0% year-on-year, slightly lower than market expectations, and the previous value was 4.1%, and the October CPI increased by 0% month-on-month, slightly lower than market expectations, and the previous value was 0.4%. After the release of the US CPI data for October, the dollar index slipped all the way from 105.53 to 104.60.

"Looking at the breakdown data, the general direction is basically the same as in September. The energy index fell 2.5% in October, and the gasoline index fell 5.0% this month amid increased domestic production, offsetting gains in other energy component indices. The food index continued to rise 0.3% in October, following a 0.2% increase in September. The household food index rose 0.3% month-on-month, while the out-of-home food index rose 0.4%. Zhu Jintao, an analyst at Everbright Futures, said in an interview with a reporter from the China Times.

The US core CPI slowed slightly to 4% in October from 4.1% in the previous month, which was also lower than the expected 4.1%, but still above the Fed's target of 2%, and the month-on-month growth slowed to 0.2% from 0.3%, lower than the expected 0.3%. Among them, the indices that rose in October included rents, equivalent rents, motor vehicle insurance, medical care, entertainment and personal care. Indices for home-away accommodation, used cars and trucks, communications, and airline ticket prices were among the indices that fell this month.

"The unexpected cooling of the US CPI and core CPI in October has reduced the pressure on the Fed to continue to raise interest rates to a certain extent, but the personal consumption expenditures (PCE) data released by the US Bureau of Economic Analysis (BEA) is closer to the real inflation rate in the United States than the CPI statistics on the price changes of a basket of goods, so the core PCE excluding food and energy is used as the Fed's monetary policy target. Zhu Jintao said.

In addition, if the current market turns too quickly to optimism due to the cooling of CPI, at a time when interest rates are at historically high levels, the rapid rebound in the capital market may bring certain liquidity risks and inflation rebound risks, hindering the Fed's efforts to continue to slow economic growth and reduce inflation. Therefore, it cannot be ruled out that it will affect the Fed's subsequent monetary policy formulation.

In addition to the inflation data, Xu Yaxin, dean of the Jiangxin College, said in an interview with the China Times that the U.S. labor market data has also cooled. The seasonally adjusted non-farm payrolls in the United States increased by 150,000 in October, the smallest increase since June, and less than the market expectation of 180,000. The U.S. unemployment rate recorded 3.9% in October, the highest level since January 2022, and the market expected 3.8%. Weak non-farm payrolls, moderate inflation, which has confirmed that July this year is the last round of interest rate hikes by the Federal Reserve, and the upcoming December interest rate meeting, the Fed will still choose to stand still.

Investment banks have increased their bets on interest rate cuts next year

Although the US CPI data for October has changed, some industry insiders believe that the one-month data is too short-lived, and once the CPI data rises in November, it may be another expectation.

Chen Jing, a precious metals researcher at Galaxy Futures, said that looking back, since the fourth quarter of last year, the comprehensive inflation and core inflation in the United States as a whole have been in a downward channel, although the former has risen briefly after June this year due to base effects, rising energy prices and other factors, but with the decline in energy prices has re-turned downward, while the latter, that is, the core inflation that the Federal Reserve is more concerned about, due to monetary tightening, the easing of the mismatch between supply and demand caused by the epidemic, and the gradual balance of the labor market, continue to decline.

At the same time, Peter Andersen, founder of Boston Andersen Capital Management, also said that a slight change in the CPI data in the right direction will not hurt the current statement that the Fed has stopped raising interest rates. This is likely to be a good thing, and Powell is expected to continue his cautious tone, as this is the early stage to show that tightening is working.

JPMorgan Chase & Co. economist Michael Feroli also said that the CPI data further reduced the probability of an already low December interest rate hike, and these data may also affect the Fed's forecast released at the next meeting, the latest inflation data suggests that inflation in the fourth quarter may be lower than the Fed's September forecast, and the Fed may have little reason to overshadow the dovish stance with a more hawkish dot plot.

It is understood that some foreign exchange market traders also believe that with the release of US inflation data, the trading sentiment of the market has changed, especially for the advance of the timing of the Fed's interest rate cut in 2024 and the expansion of expectations for the magnitude of interest rate cuts. In this regard, Xu Yaxin, dean of Jiangxin College, said that since the Federal Reserve's aggressive interest rate hike has been emphasizing that it is in response to high inflation data, with the decline in core inflation, the market's expectations have changed.

"The downside in inflation is a boon for risk assets in the short term, which has sealed the Fed's room for further tightening and allowed the market to shift to potential monetary easing beyond the second quarter of next year. Therefore, after the release of the U.S. inflation data overnight, the U.S. dollar index plunged sharply below the 105 mark, hitting a new one-and-a-half-month low of 103.98, U.S. stocks also opened higher and moved higher, U.S. Treasury yields fell, and gold, silver and oil rebounded. Xu Yaxin said.

It is worth noting that the U.S. inflation data, which cooled more than expected, will significantly improve the market's risk appetite sentiment. After the release of the CPI data on November 14, there was a double-digit dive in US Treasury yields across the board, with the yields on 2- to 10-year US Treasury bonds falling by more than 20 basis points. Among the three major indexes, the S&P and Dow rose more than 1%, and the Nasdaq rose more than 2%. Whether the short-term easing sentiment can continue the rally in the equity market depends on the performance level of listed companies.

Zhu Jintao, an analyst at Everbright Futures, said in an interview with the China Times that the trading logic of China's A-shares depends more on the repair of economic fundamentals than on the improvement of external sentiment. After a period of rally, the A-share market has seen a clear sector divergence, and the index has begun to build a short-term shock center. With the release of economic and financial data in October, the pace of slow economic recovery has been confirmed, and the market has begun to pay attention to the direction of industrial layout under the new normal of the economy.

What will be the impact on global assets

According to the Fed's arrangement, the next interest rate meeting will be held on December 12-13, US time. In the meantime, a series of economic and financial data released by the United States will become an important reference for the Federal Reserve to formulate monetary policy, especially the PCE data for October will be released on November 30, which will affect the future trend of inflation expectations in the United States.

"Although the Fed has not made a statement on the specific timing of the start of interest rate cuts, the process of reducing the size of the Fed's balance sheet is likely to end in the first quarter of next year, and the Fed's balance sheet size has fallen by a cumulative $1.1 trillion since the announcement of the balance sheet reduction plan in May 2022. Zhu Jintao, an analyst at Everbright Futures, said in an interview with a reporter from the China Times.

The latest market expectations for when the Fed will start cutting interest rates show that considering that inflation and employment have indeed entered a downward channel, and the US economy will begin to slow down from the fourth quarter, the Fed may start cutting interest rates for the first time at the end of the second quarter of next year (June next year), which is earlier than previously expected (the previous forecast is around July next year). The possibility of an early opening of the interest rate cut window due to a recession or a severe liquidity crisis cannot be ruled out.

However, Xu Yaxin, dean of the Jiangxin College, said that the Federal Reserve will hold its last interest rate meeting of the year on December 13, which will release the dot plot and future economic and inflation forecasts. Before the release of the inflation data, the market widely expected that the Fed would start cutting interest rates for the first time in May or June next year, and after the release of the data, this expectation was brought forward to March next year at the earliest, and by July next year, two rate cuts are expected.

Xu Yaxin said in an interview with the China Times that in the short term, after gold broke through and stood firm at $1,950 per ounce, the next resistance pointed to $1,980 per ounce. Previously, driven by safe-haven buying driven by geopolitical factors such as the Palestinian-Israeli conflict, gold prices once hit a high near $2,010 per ounce, and it is expected to remain range-bound in the near term.

At the same time, Chen Jing, a precious metals researcher at Galaxy Futures, also said that gold is expected to be volatile in the future. In the short term, the attractiveness of gold will increase as the dollar and Treasury yields weaken, but it will still put some pressure on gold as a non-yielding asset as the Fed is likely to keep interest rates high for an extended period of time. In the medium term, the future of the U.S. economic growth slowdown, the U.S. bipartisan divide is becoming more intense, casting more shadows on the high deficit of the U.S. finance, exacerbating the uncertainty of the U.S. economy, and the time point for the Federal Reserve to start cutting interest rates is gradually approaching, gold may gain more sufficient upward momentum.

Since the second half of last year, global central banks have set off a wave of gold purchases, and the mainland central bank has purchased gold for 12 consecutive months, which will raise the gold price center in a longer dimension.

In addition, due to the safe-haven nature of gold, if geopolitics tightens, market risk aversion will also push up the demand for precious metals, bringing an impulsive rise in gold prices.

However, compared to gold, the Fed's interest rate cut expectations will cause the dollar index to fall, and crude oil will also rise, whether this will also slow down the pace of interest rate cuts. In this regard, Zhu Jintao, an analyst at Everbright Futures, said that although the decline in the US dollar will make crude oil rise, the general logic that the crude oil market may turn into a surplus in early 2024 has not changed as the growth of global demand slows. In addition, the short-term U.S. crude oil inventories continue to increase, and the momentum for the continuous rebound of oil prices under the current rhythm is relatively limited, which has little impact on whether the Fed will cut interest rates.

Editor-in-charge: Shuai Kecong Editor-in-chief: Xia Shencha