Our model shows that there are challenges in core CPI regressing intervals within 6% at the end of the year. Given that the October inflation and employment data were released at the Fed's 211 interest rate meeting, the inflation data will set the tone for the November hike rate hike, We believe that the Fed will raise interest rates 75bp in November and 50bp in December, and the policy interest rate ceiling at the end of the year will rise to 4.5%. In order to suppress inflation, policy interest rates will remain at high levels for some time in 2023, which will further increase the attractiveness of cash relative to risky assets.
Housing rent, food and medical care continued to boost U.S. inflation in September. Specifically: the month-on-month growth rate of energy sub-item continued to be negative in the third quarter, and the month-on-month decline in in September narrowed to -2.1%. With the arrival of the heating season, the contribution of energy projects may flatten by the end of the year. food sub-item, the month-on-month growth rate of in September remained flat in August, and the year-on-year growth rate slightly narrowed to 11.2%, and is expected to continue to decline in the fourth quarter. In terms of core products, although the supply conditions of most products of have improved, the automobile market is still tight, and the prices of new cars are still supported, but it was offset by the significant decline in the prices of used cars. The month-on-month growth rate of core products in September was zero (Figure 3-Figure 4). core services are still the main driving force of inflation, with a month-on-month growth rate rising to 0.8% and a year-on-year growth rate rising to 6.7%.
From the fourth quarter of 2022 to 2023, although the slowdown in the US economy will further reflect and help inflation fall, the process is slow because the rise in housing rents and service industry wages have greatly increased the stickiness of US inflation. We expect that CPI will end the downward trend from July to October in November and rebound again. On the one hand, energy prices may rise again when the fourth quarter heating season arrives. On the other hand, the core CPI decline is slow driven by housing rents. Our updated prediction model shows that the core CPI will fall back to nearly 6.3% at the end of 2022 and fall to within 4% in the third quarter of 2023 (Figure 5).
House rents support for U.S. inflation will continue until mid-2023. In September, the year-on-year growth rate of the US CPI housing rent sub-item rose to 6.6%, and the month-on-month growth rate was 0.7% (Figure 6-Figure 7), which remained the same in August. Although the housing market has cooled down, the transmission of housing prices to housing rents has lagged behind, and the decline rate of CPI housing rent sub-item will still be very slow. We expect the year-on-year growth rate of housing rent sub-item will not fall below 5% until the second quarter of 2023.
The momentum of wage increase in the service industry is slow to ease, and the average hourly wage growth rate in September is still as high as 5%. The slowdown in wage growth in various industries has differentiated . Judging from the annualized and month-on-month growth rate, although the overall average hourly wage of the private industry has dropped to 4.4% after the correction (three-month moving average), the decline in growth rate is mainly contributed by industries such as mining and manufacturing, and the wage growth rate of the service industry remains high (Figure 8). As shown in Figure 9, the year-on-year salary growth rate of the leisure and hotel industry, which ranked first in growth, was still around 8% in August-September, the same as in July-August.
Overall, various economic indicators show that US economic growth is still strong in the third quarter, and the Atlanta Fed's forecast of the month-on-month growth rate of US real GDP in the third quarter has been raised to 2.9% (Figure 10).
Therefore, the upward risk of policy interest rates is still greater than the downward risk, and the interest rate will remain high for a certain period of time. After the hawkish statements made by the Federal Reserve's interest rate agenda meeting in September, the market adjusted its forecast for the interest rate hike path. The final interest rate value was revised up to higher than the level at the end of 2022, but was still lower than the Federal Reserve's guidance (Figure 11). Employment and inflation data for November will be released before the December interest rate meeting. If the two slow down for two consecutive months, the rate hike in December is expected to drop to 50bp. However, according to our observations on the statements of Fed officials in Table 2, there is no sign of loosening the determination of the Federal Reserve to raise interest rates in . The possibility that the September dot chart's forecast for the 4.6% rate hike in 2023 will be further revised.
The Federal Reserve's determination to suppress inflation means that it will not cut interest rates immediately after the rate hike, but tend to maintain interest rates at a high level for a certain period of time, and only consider lowering interest rates after the downward trend of inflation stabilizes. While the interest rate of
remains high, the attractiveness of cash relative to risky assets is also increasing. Driven by rising inflation, the Federal Reserve is raising policy interest rates at the fastest pace in decades. Since July, the 10Y-2Y US Treasury yield curve has continued to invert and will remain in the future. The cash yield has risen to a high in the past 15 years. Compared with long-term assets with higher volatility, the attractiveness of cash has increased. The trend of funds flowing into cash from risky assets such as US stocks and long-term US bonds will continue for a certain period of time (Figure 12-Figure 13). From this point of view, we believe that the pullback of US stocks and US bonds will continue until 2023.
Risk warning: The mutation of the new coronavirus caused the vaccine to fail, and the outbreak of confirmed cases led to the US economy returning to blockade; the situation in Russia and Ukraine was out of control, causing commodity price fluctuations
This article comes from the securities research report selected
