U.S. inflation fell as expected in April.In April 2023, the year-on-year growth rate of U.S. CPI and core CPI fell as scheduled. Among them, housing rents, second-hand cars, gasoline and other sub-items rose rapidly month-on-month, while prices of food and medical care remained stable. From the perspective of year-on-year CPI growth, housing rents in April dropped slightly by 0.1 percentage points from March to 2.8%, the energy sub-item dragged down by 0.4 percentage points for the second consecutive month, and the drag on the second-hand car and truck sub-items narrowed by 0.1 percentage points. to 0.2%. After the April inflation data was released, the market’s expectations for the policy rate were slightly lowered. The CME interest rate futures market expects that the probability of no interest rate hike in June will rise to more than 90%, and further bet on 3 interest rate cuts in the second half of the year (75BP).
From January to April, US inflation slowed down.From January to April 2023, U.S. inflation will fall more slowly than in the second half of 2022. The average month-on-month growth rate of CPI from January to April 2023 is 0.35%, which is higher than the average month-on-month growth rate of 0.23% in the second half of 2022. The reason is that the drag on CPI due to the drop in energy prices has dropped significantly, and the price of second-hand cars has stopped falling and rebounded. This suggests that the benefits of improving supply are running out, while demand-driven inflation remains stubborn. We understand that the resilience of US core inflation matches the resilience of household consumption. In the first quarter, the consumption of motor vehicles and parts in the United States increased significantly, which matched the rebound in the price sub-item of used cars and trucks in the CPI in the United States.
The risk of a rebound in U.S. inflation in the second half of the year deserves attention.In the second quarter of this year, due to base factors, the year-on-year growth rate of CPI in the United States showed a rapid decline. It is easy for the market to be optimistic about the decline in U.S. inflation and ignore the resilience of the month-on-month trend of inflation. But after the third quarter, the base effect is no longer beneficial. Under the baseline scenario, the headline inflation rate in the United States is likely to stabilize. We further suggest the possibility of higher-than-expected U.S. inflation in the second half of the year: First, auto prices may rise more than expected. A pick-up in U.S. auto consumption in the first quarter could bolster automakers’ finances and limit their room for further price cuts. In addition, the year-on-year growth rate of inventories of US automakers has declined rapidly. Second, the fall in rents may lag behind again. At present, the market expects housing rents in the United States to fall in the second half of the year. However, the correlation between US home prices and rents has historically been erratic. Considering that the current U.S. housing vacancy rate is at a historically low level, the tight housing supply may also hinder the downward slope of housing rents. Third, energy prices may rebound more than expected due to supply disturbances. Global energy demand remains strong; OPEC+ frequently takes action to protect oil prices, and new actions will not be ruled out in the future; European energy risks may pick up in the next round of winter.
If U.S. inflation becomes more stubborn in the second half of the year, it may be more difficult for the Fed to cut interest rates.If the current strong interest rate cut expectations are weakened by gradual revisions, the market may need to reassess the negative impact of the Fed’s prolonged high interest rate on the economy, which may further factor in the risk of a mid-term economic recession. Correspondingly, the adjustment pressure of US stocks has not dissipated, because there is still room for downward revision of profit expectations; during the period of upward revision of inflation and monetary tightening expectations, US bond interest rates and the US dollar index may gradually stabilize, and gold prices may gradually pull back.
risk warning:U.S. financial risks have risen more than expected, the U.S. economy has declined more than expected, and the Federal Reserve has cut interest rates earlier than expected.
The text is as follows:
In April 2023, the year-on-year growth rate of U.S. CPI and core CPI fell as scheduled, and the market further bet that the Fed will not raise interest rates in June and cut interest rates in the second half of the year. But it is worth noting that since 2023, the rate of decline in U.S. inflation has been slower than in the second half of 2022. The benefits brought by improved supply are running out, while demand-driven inflation remains stubborn. We believe that the US inflation risk may be in the second half of the year. When the base effect is no longer favorable, the US headline inflation rate may stabilize, and an unexpected rebound cannot be ruled out. Specifically, the risks of rising car prices in the second half of the year, lagging housing rents, and a rebound in energy prices are all worthy of attention. If U.S. inflation becomes more stubborn in the second half of the year, it will be more difficult for the Federal Reserve to cut interest rates, and the risk of U.S. mid-term economic recession will further increase.
1. U.S. inflation fell as expected in April
In April 2023, the U.S. CPI was lower than the previous value and expectations year-on-year, and the core CPI was flat year-on-year and lower than the previous value.The U.S. Department of Labor (BLS) released data on May 10 showing that the U.S. CPI in April was 4.9% year-on-year, slightly lower than expected and 5% from the previous value, and has declined for 10 consecutive months; April CPI was 0.4% month-on-month, unchanged from expectations. 0.1% higher than the previous value. The core CPI in April was 5.5% year-on-year, unchanged from expectations, slightly lower than the previous value of 5.6%, and the slow downward slope showed inflation stickiness; the core CPI in April was 0.4% month-on-month, unchanged from expectations and the previous value.
Structurally, housing rents, second-hand cars, gasoline and other sub-items rose rapidly month-on-month, while prices of food and medical care remained stable.First of all, the CPI food sub-item has zero growth month-on-month for two consecutive months, and the decline in home food prices and the increase in food prices for outings offset each other. Secondly, the CPI energy sub-item rose by 0.6% month-on-month, which was significantly higher than the previous value of -3.5%. Among them, energy services were -1.7% month-on-month, higher than the previous value of -2.3%; energy commodities were 2.7% month-on-month, higher than the previous value -4.6%. The previous value was -4.6%. In addition, core commodity prices were 0.6% month-on-month, higher than the previous value of 0.2%, the largest increase since mid-2022, of which used cars and trucks were 4.4% month-on-month, higher than the previous value of -0.9%; core services were 0.4% month-on-month, unchanged from the previous Value, of which the housing rent was 0.5% month-on-month, which was 0.6% lower than the previous value.
Judging from the year-on-year pull of CPI,In April, housing rents dropped slightly by 0.1 percentage points to 2.8% compared with March, food products dropped 0.2 percentage points to 1.0%, transportation services dropped 0.2 percentage points to 0.6%, and energy sub-items dragged down 0.4 points for the second consecutive month percentage points, the drag of the second-hand car and truck sub-items narrowed by 0.1 percentage points to 0.2%; the “other” items other than the above sub-items pulled 0.9%.
After the April inflation data was released, the market’s expectations for policy interest rates were slightly lowered. The US stock market Nasdaq and S&P 500 closed up, while US bond interest rates and the US dollar index fell slightly.On May 10, CME FedWatch showed that the probability that the Federal Reserve will stop raising interest rates in June rose from 78.8% the previous day to 91.5%; the weighted average interest rate forecast for the December interest rate meeting was lowered to 4.26% from 4.36% the previous day. That is, the market further bets on about 3 interest rate cuts (75BP) in the second half of the year. On the same day, the U.S. stock Dow Jones index fell slightly by 0.09%, the S&P 500 index and the Nasdaq index rose by 0.45% and 1.04% respectively; U.S. bond yields fell across the board, and the 10-year U.S. bond yield fell 10BP to 3.43%. Bond yields fell 11BP to 3.90%; the U.S. dollar index fell 0.21% to 101.4; London gold spot fell 0.23% to $2029 an ounce.
2. U.S. inflation slowed down from January to April
From January to April 2023, U.S. inflation will fall more slowly than in the second half of 2022. The benefits brought by improved supply are running out, while demand-driven inflation remains stubborn.We estimate that the average month-on-month growth rate of CPI in the United States from January to April in 2023 is 0.35%, which is higher than the average month-on-month growth rate of 0.23% in the second half of 2022; the average month-on-month growth rate of core CPI remains at a high level of 0.42-0.43%. The reason for the rise in the CPI month-on-month trend is that the core inflation remains high, and the drag on the CPI due to the fall in energy prices has decreased significantly: In the second half of 2022, international energy prices have fallen from high levels, and the US CPI energy sub-item has dropped by an average of 2.2% month-on-month. Prices have basically stabilized, with the energy sub-item falling by only 0.4% month-on-month on average. In terms of core inflation, the most important quarter-on-quarter growth rate of housing rents remained high, while second-hand car prices rebounded and offset the benefits of falling health care prices. We have pointed out in previous reports that in the U.S. inflation structure, the effect of improving supply factors has weakened marginally, while demand factors have not cooled significantly, making the extent of inflation fall doubtful (refer to the report “Repeated Inflation Pressures in the United States“, etc.).
It should be pointed out that the resilience of US core inflation matches the resilience of household consumption.In the first quarter of 2023, U.S. personal consumption expenditures will increase by a substantial 3.7% (annualized rate) quarter-on-quarter, contributing as much as 2.5 percentage points to the quarter-on-quarter annualized rate of U.S. GDP in the first quarter. Structurally, service consumption remained strong, while durable goods consumption rebounded significantly, especially the consumption of motor vehicles and parts, which matched the rebound in the used car and truck sub-items of the US CPI.The resilience of U.S. household consumption is not only benefited from excess savings that have not been exhausted, wage growthLong andThe health of household balance sheets, etc., may also come from the improvement of residents’ income and wealth distribution, the increase in property interest income, the increase in real income, and the improvement of consumption expectations. Also comment on the first quarter GDP data of the United States”).
3. The risk of US inflation rebounding in the second half of the year deserves attention
In the second half of this year, the risk of higher-than-expected inflation in the United States deserves attention.Considering the U.S. economic downturn and inflation stickiness, our baseline assumption is that the average month-on-month growth rate of the U.S. CPI in 2023 may be around 0.3%, which is between the average value of January-April 2023 (0.35%) and the second half of 2022 (0.23%). %), but still higher than the 2015-2019 average (0.15%); the weaker assumption is 0.2%, which means that the impact of weaker US demand is considered to be greater; the stronger assumption is 0.4%, which means that the US inflation is sticky stronger or a new supply shock occurs. Assuming that the U.S. CPI seasonal adjustment is 0.2/0.3/0.4% during the year, the U.S. CPI seasonal adjustment in June 2023 may reach 3.2/3.4/3.6% year-on-year, and it may reach 2.9/3.8/4.6% in December. This means that in the second quarter, due to base factors, the year-on-year growth rate of CPI in the United States fell rapidly. Even if the CPI remained at a high level of 0.4% in May and June, the year-on-year growth rate of CPI may fall back to around 3.5%. During this period, it is easy for the market to be optimistic about the pullback in inflation and ignore the resilience of the month-to-month trend in US inflation. But after the third quarter, the base effect is no longer beneficial. Under the baseline scenario, the headline inflation rate in the United States is likely to stabilize.
On this basis, we further suggest the possibility of higher-than-expected U.S. inflation in the second half of the year.
First, car prices may rise more than expected.Affected by the fiscal stimulus in early 2021, the consumption of durable goods such as automobiles in the United States once exploded, but it has gradually cooled since the second half of 2021. However, there are signs that the US auto consumer demand is not completely “overdrawn”. Since 2023, as the international supply chain continues to repair and most electric vehicle companies start a “price war”, US auto consumption has stabilized and rebounded. In the first quarter of 2023, the consumption of motor vehicles and parts in the United States will increase by 4.4% year-on-year, achieving positive growth after six consecutive quarters of negative growth. Higher-frequency data also confirms the trend of U.S. auto consumption rebounding. From January to March 2023, the year-on-year growth rates of domestic auto sales in the United States will reach 5.8%, 7.5% and 9.2%, respectively, accelerating growth for three consecutive months. A pick-up in car sales will bolster automakers’ financial positions and limit their room to continue lowering prices. In addition, according to data from the U.S. Department of Commerce, as of March 2023, the year-on-year growth rate of automakers’ inventories fell to 1.5%, which was maintained at around 10% in 2018-19, suggesting that pressure on auto supply may rise in the future. Therefore, in the second half of the year, both the number and price of US auto sales may rise more than expected.
Second, the fall in rents may lag behind again.Historical data shows that US housing prices (OFHEO independent home purchase price index) lead the CPI year-on-year, housing rents range from 9 months to 2 years. The current round of year-on-year growth in U.S. housing prices will peak and fall around mid-2022, and the market expects that the year-on-year growth rate of U.S. housing rents will slow down in the second half of 2023. However, the correlation between housing prices and rents is not stable. In addition, considering that the current US housing vacancy rate is at a historically low level, tight housing supply may also hinder the slope of housing rent decline. If the month-on-month growth rate of CPI housing rents continues to remain above 0.5%, it will be difficult for the U.S. CPI to drop below 0.3% month-on-month, and there is a risk of a rebound in CPI year-on-year.
Third, energy prices may rebound more than expected due to supply disturbances.First, despite the dusty economic outlook in the US and Europe, global energy demand remains strong. The International Energy Agency (IEA) released its monthly report in mid-April, showing that it expects global oil demand to increase by 2 million barrels per day in 2023, mainly due to the recovery of demand in China. Secondly, OPEC+ frequently takes actions to protect oil prices, and new actions will not be ruled out in the future. Since the second half of 2022, OPEC+ has adjusted production more frequently to intervene in the market and protect oil prices. In early April this year, OPEC+ unexpectedly announced production cuts, which boosted international oil prices that had fallen due to the US and European banking crises. But the good times did not last long. Since late April, the banking crisis in the United States has resumed, and oil prices have corrected. According to IMF data, Saudi Arabia’s fiscal breakeven oil price in 2023 will be $80.9/barrel. Looking back, it is not ruled out that OPEC+ will further cut production to protect oil prices. Finally, European energy risks may pick up in the next round of winter. Looking ahead to the second half of the year, the energy situation in Europe is still uncertain. According to the December 2022 report of the IEA, there will still be a gap of 27 billion cubic meters of natural gas supply and demand in the EU in 2023. OPEC predicted in November 2022 that if there is insufficient LNG imports or a “cold winter”, European natural gas reserves may be below the warning level. Once the energy risks in Europe resurface, the prices of international energy products such as crude oil and natural gas may rebound.
If U.S. inflation becomes more stubborn in the second half of the year, it may be more difficult for the Fed to cut interest rates.If the U.S. CPI year-on-year growth rate remains above 3.8% by the end of the year, the corresponding PCE will remain above 3% year-on-year, which is basically in line with the forecast level of the Federal Reserve in December 2022. At that time, the expected median value of PCE in 2023 was 3.1%, and the median expected value of core PCE was In his speech, Powell made it clear that interest rates may not be cut in 2023. It can be inferred from this that if the PCE remains above 3% year-on-year, the Fed may not have enough confidence to choose to cut interest rates. As of now, market expectations for the Fed to cut interest rates in the second half of the year are still strong. If strong interest rate cut expectations are weakened by gradual revisions, the market may need to reassess the negative impact of the Fed’s prolonged high interest rate on the US economy, which may further factor in the risk of a mid-term economic recession. Correspondingly, the adjustment pressure on U.S. stocks has not yet dissipated, because there is still room for downward revision of profit expectations; during the period of “upward revision” of inflation and monetary tightening expectations, U.S. bond interest rates and the U.S. dollar index may stabilize in stages, and gold prices may stage a correction.
risk warning:U.S. financial risks have risen more than expected, the U.S. economy has declined more than expected, and the Federal Reserve has cut interest rates earlier than expected.
This article is selected from the WeChat public account: Zhong Zhengsheng Economic Analysis. Authors: Zhong Zhengsheng, Fan Chengkai. Zhitong Finance Editor: Zhang Jiwei.
Massive information, accurate interpretation, all in the Sina Finance APP