Authors: Zhong Zhengsheng, Fan Chengkai (Zhong Zhengsheng is a director of the China Chief Economist Forum and the chief economist of Ping An Securities)
Key takeaways
After a quarter of rebounding inflation, the US CPI data for April 2024 cooled as expected, restoring expectations for interest rate cuts within the year. However, on the whole, inflation only cooled marginally in April, and the absolute level of most sub-items remained high. Specifically, energy inflation rose at a high level for three consecutive months, despite the recent decline in oil prices; The improvement in housing inflation was not significant enough and higher than our model projected; The non-housing services segment has temporarily retreated, but the subsequent trend is more uncertain. In our view, the improvement in monthly inflation is not enough to catch up with the "lost progress" of the previous quarter's inflation pullback. In the coming period, it is still necessary to be vigilant against the volatility of interest rate cut expectations and their possible impact on the market.
The US CPI data for April 2024 cooled as expected. The US CPI in April was 0.3% month-on-month, lower than the previous value and market expectations of 0.4%; The CPI was 3.4% year-on-year, down from 3.5% in the previous month, in line with expectations, and the year-on-year reading finally fell again after rebounding for three consecutive months. The core CPI in April was 0.3% month-on-month, lower than the previous value of 0.4%, in line with expectations; The core CPI was 3.6% year-on-year, lower than the previous value of 3.8%, in line with expectations. Structurally, the month-on-month growth rate of food, housing rent, health care, and transportation fell back, while the month-on-month growth rate of energy, clothing, entertainment, education and communication remained flat or higher than the previous value.
Energy inflation remains high and is expected to fall in the future. In April, the CPI energy sub-item increased by 1.1% month-on-month, unchanged from the previous value, and has increased by more than 1% month-on-month for three consecutive months. From February to April this year, the monthly average price of WTI crude oil futures maintained a high level of 4-5% for three consecutive months. However, since May, international oil prices have fallen, with the average value of WTI in the first half of the month at $78.7 per barrel, down 6.8% month-on-month from the average value of $84.4 per barrel in April. Based on the trend of oil prices, the energy sub-item is expected to decline significantly or even negative month-on-month in May.
Housing inflation has improved, but the pace of decline is still slow. In April, the CPI housing rent sub-item fell to 0.4% month-on-month from the previous value of 0.5%, and the CPI residential sub-item remained unchanged from the previous value of 0.4%. In the past six months, the CPI has fluctuated in a range of 0.4-0.6% month-on-month, which is still high. In our report "U.S. Inflation Revisited: A Rent-Based Perspective", we predict that based on the leading position of the year-on-year growth rate of housing prices on rent inflation, the CPI residential sub-item is expected to fall to 5.2% year-on-year in April this year, but the actual value of this sub-item is recorded at 5.5%, which shows that the current rent inflation is not falling as fast as expected.
Transport services have fallen, but absolute levels remain high. In April, the CPI transportation services sub-item was 0.9% month-on-month, lower than the previous value of 1.5%, but the absolute level was still high; This sub-item is still as high as 11.2% year-on-year. Among them, the sub-item of "motor vehicle insurance", which has a large pull on this sub-item, fell from 2.6% to 1.8% month-on-month, and the average month-on-month increase in the past year was as high as 1.7%. The sub-item of "super core services" (excluding energy and housing services) fell from 0.6% to 0.4% month-on-month, and the absolute growth rate was not weak; This was supported by a 0.7% quarter-on-quarter decline in energy services and a sharp decline in non-housing services from 0.8% to 0.2% quarter-on-quarter, but a rebound from 4.8% to 4.9% year-on-year. In the past six months, the non-housing service sub-item has fluctuated sharply in the range of 0.2-0.8% month-on-month, with an average month-on-month of 0.5%, and it is difficult to say that this sub-item can maintain a downward trend in the future.
The fall in inflation in April was only a catch-up with "lost progress". Against the backdrop of a rebound in inflation in the first quarter, to what extent will the improvement in inflation in April be able to catch up with the "lost progress"? It's actually quite limited. In contrast, the overall month-on-month level of CPI and the average month-on-month level of each sub-item from January to April this year is still generally higher than that in the second half of 2023. Based on the December 2023 CPI, the actual year-on-year CPI (3.4%) as of April 2024 is higher than the forecast (3.3%) under the "strong" assumption under three month-on-month assumptions (0.15% weaker, 0.25% neutral, and 0.35% stronger). Similarly, the actual core CPI (3.6%) was unchanged from the "strong" assumption. Clearly, a marginal improvement in inflation in a single month is not enough to improve the inflation outlook for the whole year.
Market expectations of interest rate cuts have risen temporarily, but we need to be wary of expected volatility. On May 15, in addition to the CPI data, the latest US retail sales growth in April slowed to 0 more than expected. Coupled with Powell's reiteration that he does not support interest rate hikes this week, as well as the unexpected surge in unemployment benefits data last week, the market is more sensitive to the marginal improvement of inflation and the marginal cooling of the economy, which temporarily warms up the expectation of interest rate cuts. CME data showed that on May 15, the market's bets on a rate cut in September rose from 65% to 75%, and the number of rate cuts for the year rose from 1.7 to 2. On the same day, the three major U.S. stock indexes closed up 0.9-1.4%, the 10-year U.S. Treasury yield fell 9bp to 4.36%, a new low in a month and a half, and the U.S. dollar index fell 0.66% to 104.3 during the day. However, from a rational point of view, the improvement in inflation in April was modest, which was not enough to offset the pressure of the rebound in inflation in the previous period, and it is uncertain whether it can continue to cool down in the future. In the coming period, it is still necessary to be vigilant against the volatility of interest rate cut expectations and their possible impact on the market.
Risk warning: the U.S. economy cooled more than expected, the U.S. employment cooled more than expected, and the U.S. liquidity risk broke out more than expected.