On October 10th local time, the U.S. Bureau of Labor Statistics released the inflation data for September. Seasonally adjusted, the CPI for September rose 2.4% year-on-year, while the core CPI rose 3.3% year-on-year. Inflation continued its downward trend, and core inflation remained flat compared to the previous month, both exceeding expectations.
Market participants noted that the Federal Reserve's single interest rate cut of 50 basis points (bp) in September opened up market expectations for the Fed's room for rate cuts within the year. However, since last week, the hawkish statements from several Federal Reserve officials, along with the September non-farm employment data significantly exceeding expectations, have signaled that there is not a high necessity for substantial rate cuts, and the market is paying more attention to the U.S. inflation data for September.
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After the September CPI was announced, U.S. stocks, U.S. Treasury yields, the U.S. dollar index, and gold, among other assets, all maintained narrow fluctuations. As of the close of the day, the S&P 500, Nasdaq, and Dow Jones Industrial Average each fell by 0.2%, 0.1%, and 0.1%, respectively; the 10-year U.S. Treasury yield moved down by 1 bp to 4.07%, the U.S. dollar index fell by 0.1% to 102.9, and spot gold rose by 0.9% to $2,629.6 per ounce.
Both the U.S. September CPI and core CPI were higher than expected
The data showed that the year-on-year growth rate of the U.S. CPI in September fell to 2.4%, continuing its downward trend by 0.1 percentage point from the previous month. However, the year-on-year growth rate of the core CPI rebounded slightly to 3.3% compared to the previous month, mainly due to the narrowing decline in the year-on-year growth rate of core goods. Looking at specific items, this month's energy and core service items saw a decline, while food inflation rebounded, and the year-on-year growth rate of core goods narrowed.
Firstly, this month's energy item contributed more to the year-on-year decline in CPI. Affected by concerns about weak global demand, oil prices continued to fall in September, and coupled with the rise in oil prices in the same period last year, the energy item's year-on-year decline continued this month. Secondly, housing led the decline in service inflation, with the decline in leading indicators such as housing prices and market rents gradually being reflected in the CPI. Moreover, leading indicators such as housing prices and market rent indices are still declining, and future housing item inflation may continue to fall.
Lastly, the contribution of core goods to the downward trend in inflation weakened, mainly due to the rebound in used car prices. However, the sales volume of used cars in September decreased compared to the previous month, leading to a decline in the leading indicator of used car prices, the Manheim Index, and the pressure on used car prices may further ease in the future.
Overall, the decline in energy prices in September had a restraining effect on U.S. inflation, but there was a broad rebound in the prices of core goods and services, reflecting that U.S. inflation remains difficult to cure. The recent escalation of geopolitical conflicts in the Middle East has led to a significant increase in oil prices, and there is still a possibility of a slight rebound in U.S. inflation in the short term.
The possibility of U.S. inflation heating up is not significant. Currently, the U.S. CPI on a month-over-month basis has not significantly deviated from the Federal Reserve's 2% inflation target.
The macro chief analyst team of Caitong Securities, Chen Xing, pointed out that the U.S. CPI growth rate fell this month, but the year-on-year growth rate of core CPI prices rebounded slightly. However, the decline in housing prices and market rents is gradually being reflected in the CPI, and in addition, the leading indicator of used car prices, the Manheim Index, has declined, which is expected to lead to a decline in core goods prices. U.S. inflation may continue to move downward in the future.Market Expectations Suggest a 25bp Rate Cut by the Federal Reserve in November or Later
Following the release of inflation data, market expectations for a Federal Reserve rate cut have slightly increased. The Chicago Mercantile Exchange's FedWatch Tool indicates that the probability of a 25bp rate cut by the Federal Reserve in November has risen from 80.3% the previous day to 86.9%, while the probability of no rate cut has decreased from 19.7% to 13.1%. The market now anticipates a higher likelihood of a 25bp rate cut by the Federal Reserve in November or later.
The downward trend in U.S. inflation may be entering a stagnation phase. Looking ahead, the overall U.S. inflation level may rebound, led by oil prices, and the process of core inflation decline is expected to be quite bumpy. Subsequently, the market and the Federal Reserve's focus on inflation may gradually increase, and the decision-making pressure on the Federal Reserve will also become significantly higher.
The synchronous better-than-expected performance of U.S. core inflation and the job market in September may cause the Federal Reserve, which has a notably lagging decision-making framework, to reduce the magnitude of its future rate cuts. This could potentially keep U.S. long-term interest rates high. On the other hand, it may also force economies such as the Eurozone, Japan, and the UK, which are struggling with insufficient domestic demand, to abandon their expectations of rate cuts in line with the Federal Reserve and instead adopt a more aggressive rate-cutting path. This could support the U.S. Dollar Index to surge further in the short term with a higher probability and maintain a higher central level in the medium term. Should this complex situation arise, the space for central banks of major emerging economies, including China, to implement further monetary easing may be subjected to a new round of spillover pressures.
The task facing the Federal Reserve has shifted from prioritizing inflation control to balancing full employment and inflation control. In the absence of significantly higher-than-expected inflation data, the Federal Reserve may still opt for 25bp rate cuts at both the November and December meetings. The magnitude of rate cuts for the following year may need to take into account factors such as the elections.