Xinhua Finance Shanghai, May 14 (Ge Jiaming) On the 15th local time, the United States is about to release the closely watched consumer price index (CPI) data for April, and this inflation report will become the key for the market to judge whether the rising momentum of inflation in the United States has ushered in a turning point, and it will also become the core data for the market to judge when the Federal Reserve will cut interest rates.
At present, the market is widely predicting that the inflation data in the United States in April may slow slightly, with the headline CPI falling to 3.4% year-on-year from 3.5% in the previous month, up 0.3% month-on-month, and the core CPI is expected to fall from 3.8% to 3.6%, both exceeding 3% for the 11th consecutive month.
As can be seen from the chart below, the US CPI data has experienced "repeated twists and turns" in the past year and has never been able to fall below 3%, which shows the stickiness of inflation.
Image source: U.S. Department of Labor website
Since the beginning of this year, the United States has delivered three larger-than-expected inflation reports in a row, and rent and fuel have become the main drivers, accounting for more than half of the price increase, which has also caused the market to continue to delay the Fed's interest rate cuts.
There is still a debate within the Fed about when to cut interest rates, with many officials arguing that inflationary pressures still exist, and even if economic fundamentals are under pressure in the near future, a rate cut still seems far away. Federal Reserve Vice Chair Phillip Jefferson said on Monday that interest rates should be left unchanged until inflation slows.
But for many investors, the "cold" nonfarm payrolls report for April eased some of their fears, and that the cooling of the labor market will gradually pass on to prices in the future, slowing inflation. At present, the pricing of the market has fluctuated between 1~2 interest rate cuts this year.
Fed funds rate futures pricing shows that the market is now pricing in a 45 basis point rate cut by the Fed by the end of 2024, with the first rate cut in September or November. According to the CME FedWatch Tool, as of May 14, traders judged the probability of the Fed's first rate cut in September at 49.1%.
Image source: CME Group
Rents may be the key to the trend of inflation in the United States
Nick Timiraos, a well-known journalist, said that "rents are hard to come down" is becoming the key to the Fed's inability to defeat inflation.
The article explains that housing inflation is weighted by up to one-third of the consumer price index (CPI) and about one-sixth of the personal consumption expenditures price index (PCE). In housing inflation, house prices are affected by investment factors, and rents are more reflective of the real situation in the market.
In the article, Nick Timmilaus stressed that rental inflation is still at a high level, but it is showing a downward trend. Single-family home rents rose 14% in 2022, but slowed to 3.4% year-over-year in February due to increased competition in the supply of new apartments and weak inflation-adjusted income growth, according to CoreLogic data. According to Zillow, there has been a similar drop in apartment rents.
Fed Chair Jerome Powell has also previously said that he expects the decline in rental costs to eventually be reflected in the CPI, allowing the Fed to start cutting interest rates at some point in time.
Steven Englander, chief FX strategist at Standard Chartered, said in the latest report that Powell's optimism is well founded, and that the rise in landlord equivalent rent (OER) in the first quarter of this year is an anomaly, and that downward pressure will resume in the coming months, and that downward pressure is "likely to intensify".
Steven Englander explained that landlord equivalent rent (OER) refers to the expected rent that homeowners (homeowners) will receive if they rent out their home on the market, and that a regression of data based on new tenant rents and all tenant rents constructed by researchers from the Federal Reserve and the Bureau of Industry Statistics (BLS) shows that the OER increase in the first quarter of this year is an anomaly.
Morgan Stanley Chief Economist Seth Carpenter also believes that the current rental data is very weak, the vacancy rate of apartments is approaching record highs, housing inflation has released a downward signal, and the US CPI in April will be "significantly lower than expected".
But the recent release of a series of data seems to send some less optimistic signals in terms of "fighting inflation".
According to a survey report released by the New York Fed on Monday, respondents expect home prices to rise 5.1 percent in a year, up from 2.6 percent a year ago. In terms of rents, respondents expect costs to rise by 9.7% after one year, the second highest figure in the survey's history.
It should be noted that the results of the New York Fed survey "echoed" the results of the recently released consumer survey by the University of Michigan, which showed that consumer inflation expectations were higher and inflation expectations for the year ahead climbed, rising to 3.5% from 3.2% in April, the highest level since November 2023.
ING said single-family home prices, which are rising faster than apartments, are now more important as the U.S. Department of Homeland Management adjusted its weighted index this year. As a result, it may be a few months before we see an easing in rent inflation due to adjustments to how the index is calculated.
U.S. stocks and U.S. bonds may fluctuate sharply
There is a well-known Wall Street proverb called "Sell in May and go away", which is also known as the "May curse" by many investors. Historically, U.S. equities underperformed from May to October, and Treasury yields showed upward momentum during this period, and higher Treasury yields tended to weigh on U.S. stock valuations, which in turn exacerbated the "May selling effect."
In May this year, the overall performance of US stocks was relatively strong, with the S&P 500 rising about 3.7% in the month, and US Treasury yields also showed a gradual downward trend, but the real test for the market may have just begun.
Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, said that the Fed frequently emphasizes relying on data to make decisions, and every release of CPI data can become a major event that affects the market.
Ahead of the CPI release, the market was in "wait-and-see mode", with the VIX index, a measure of volatility, near year-to-date lows, and the volatility of VIX options, which is used to hedge against the sharp sell-off in the market, at its lowest level in nine years. However, if the CPI data is higher than expected again, it will increase the market's anxiety about the risk of secondary inflation and even stagflation.
George Mateyo, chief investment officer of Key Private Bank, believes that U.S. inflation is tricky, and there is still a possibility of a larger-than-expected rebound in the April CPI report, and the market should not be too optimistic and hold "unconventional assets" such as real estate and inflation-protected bonds to hedge the risk of CPI overheating.
The S&P 500 could be on the verge of a sharp decline, given that inflation is not expected to cool further from the current level and that the Fed's rate cut is expected to be further delayed, according to a team led by Barry Bannister, managing director of Stifel, an independent U.S. investment banking and financial services firm, said in a newly released report.
The report predicts that the S&P 500 will fall to 4,750 points in the second or third quarter of this year, down about 10% from Monday's level of around 5,222 points.
Many investors believe that if inflation slows, Treasuries will rise more than U.S. stocks. The yield on the 10-year Treasury note is still well above the level of less than 4% at the beginning of the year.
Ed Perks, chief investment officer at Franklin Income Investors, believes that if the data shows a slowdown in inflation, yields on short-term Treasury bonds are expected to fall by 0.2-0.25%, and yields on long-term Treasury bonds could fall by 0.1-0.2%.
Ed Perks said a sharp rally in equities is more challenging given the current overvaluation of U.S. stocks. And if inflation is higher than expected again, the stock market may have more room to fall.
Editor: Tan Rui
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