Event: 20:30 on October 13, US Bureau of Labor Statistics released September CPI data. Data shows that the US CPI rose 8.2% year-on-year in September, with an estimated 8.1%, with an previous value of 8.3%. The US CPI rose 0.4% month-on-month in September, with an estimated 0.2%, with an previous value of 0.1%. The core CPI in the United States rose 6.6% year-on-year, estimated at 6.5%, and the previous value was 6.3%. The core CPI in the United States rose 0.6% month-on-month in September, estimated at 0.5%, and the previous value was 0.6%.
. The market has repeatedly underestimated the resilience of the US CPI
Since 2021, the US market has often systematically underestimated the US CPI and core CPI. Therefore, it is not surprising that the US CPI data in September exceeded market expectations.
. Food and core CPI maintain resilience
Under the three-point method, core inflation rose 0.4% month-on-month and 6.6% year-on-year, exceeding market expectations by 6.5%. The core CPI hit the fastest growth rate since September 1982. Energy fell 2.6% month-on-month and 19.8% year-on-year; food rose 0.7% month-on-month and 11.2% year-on-year, causing CPI to rise 0.2% month-on-month and 8.2% year-on-year, exceeding market expectations by 8.1%. In 2020, affected by the COVID-19 epidemic, prices of various agricultural products worldwide continued to rise. The Russian-Ukrainian conflict in 2022 has intensified the rise in food prices in Europe and the United States, causing the year-on-year increase in the US food CPI to reach a high since June 1979. Although the year-on-year increase in US energy CPI in September fell, it was still at a high level. OPEC+ decided to reduce monthly output by 2 million barrels per day from August production starting from November, which is also not conducive to the decline in energy CPI growth in the future. Under the eight-point method of
, food and beverages rose 0.7% month-on-month, up 10.8% year-on-year; residential buildings rose 0.7% month-on-month, up 8.0% year-on-year; clothing rose 2.2% month-on-month, up 5.5% year-on-year; transportation fell 1.6% month-on-month, up 12.6% year-on-year; health care rose 0.5% month-on-month, up 6.0% year-on-year; entertainment rose 0.1% month-on-month, up 4.1% year-on-year; education and communications rose 0.3% month-on-month, up 0.2% year-on-year; other goods and services rose 0.3% month-on-month, up 6.9% year-on-year. The author has repeatedly reiterated that the current inflationary pressure in the United States is comparable to that in the 1970s. The low unemployment rate promotes the spiral inflation of wages and prices. The inflationary pressure continues to rise, and the resilience of the United States is in line with expectations.
Figure: US inflation remains high
Figure: US food prices continue to rise
Figure: US energy gains are at high
Figure: US energy gains are at high
. The US economy is not bad
Although the number of initial unemployment claims in the United States recorded 228,000 in the week from October 8, the highest since the week of September 1, 2022, with an expected 225,000, the previous value was 219,000. However, non-farm employment in the United States increased by 263,000 in September, higher than the market expectations of 255,000. The overall non-farm employment population (after the seasonal adjustment) has exceeded the level before the epidemic (February 2020). The unemployment rate in the United States was only 3.5% in the seasonally adjusted in September, still at a historical low. In view of the fact that the US nominal GDP exceeds the potential value of GDP, the actual GDP growth rate is only slightly lower than the potential GDP growth rate, and the US economy is not bad.
3. It is basically confirmed in November that rate hike 75bp
According to the "Fed Observation (FedWatch)" tool of the Chicago Mercantile Exchange Group (CME), as of October 13, the probability of the Fed raising interest rates by 75 basis points at the November policy meeting was as high as 99.8%, the probability of 50 basis points hikes by 50 basis points has dropped to 0, and the probability of 100bp hikes is 0.2%. Given the lag effect of transmission in monetary policy, the Federal Reserve should not raise interest rates by 100bp.
4, CPI increase determines the rate hike
From historical experience, during the period of high inflation, the Fed rate hike is basically close to or even higher than the CPI increase. Fed officials have also repeatedly stated that they need to continue hikes until the real interest rate is positive. According to the Federal Reserve's forecast for economic trends in September, inflation expectations were raised by 0.2 percentage points to 5.5%, and the median core PCE price index was raised by 0.2 percentage points to 4.5%.The Federal Reserve is likely to raise interest rates by 425bp throughout the year, reaching the range of 4.25%-4.5% by the end of this year; it is certain that the rate rate hike is 450bp this year. Even if the US CPI falls as scheduled, it is expected to remain at around 5% in February 2023. The cumulative interest rate hike in this round of the Federal Reserve may reach 475bp, with the final interest rate in the range of 4.75%-5%.
Figure: During the period of high inflation, the Fed's interest rate hike is basically close to or even higher than the CPI increase
Table: Federal Reserve's economic and policy forecast in September 2022
, The US economy is likely to begin recession in 2023
US historical experience shows that the term interest rate spread inverted indicates recession. Since July 1961, there have been 9 inverted interest rates between the 10-year Treasury bond and the 2-year Treasury bond maturity in US history. Eight of them experienced economic recession 6-24 months later. Only after the maturity spread inversion occurred in 1966, the economy did not fall into recession within 2 years. Although there was no recession, the US real GDP growth rate ( quarter-on-year rate ) fell sharply in 1967, from 10.1% in the first quarter of 1966 to 0.2% in the second quarter of 1967, a decrease of 9.9 percentage points. Given that the interest rate term structure contains a lot of useful information, the Federal Reserve, the Bank of England, and other central bank have included it in the leading economic prosperity index and regularly announced changes in long-term and short-term interest rate spreads. Market personnel will also track the interest rate spread of 10-year and 2-year treasury bonds to predict future economic trends. Especially be wary of the inverted term spreads to deal with the possible economic recession in advance. In April 2022, the U.S. Treasury maturity spread was inverted again. Given that the current US labor market is as good as in 1999-2000 and the economic resilience remains, the US economy is likely to fall into recession in 2023. If U.S. inflation eases in 2023, interest rate cuts are expected to begin in 2023; if inflation is still at a high level, interest rate cuts may not begin until 2024.
Although the US CPI may exceed expectations in September, as the author pointed out in "CPI breaks through three risks, and A shares has a small risk of falling - Market Strategy Weekly Report 20220926-20221009", before the November US CPI data released in early December, it is expected that 10-year US bond will maintain a range of fluctuations between 3.6%-4%. USD index fluctuated between 110-117 until the interest rate meeting in December. The CPI, which exceeded expectations in September, will not cause the interest rate hike in November to reach 100bp, and the impact is not big.
U.S. 10-year Treasury bond interest rate is likely to rise to 4.75%. According to historical experience, if the Federal Reserve raises interest rates, the final level of the 10-year Treasury bond interest rate will be comparable to the high point of the US federal funds rate , which means that the US 10-year Treasury bond interest rate will eventually rise to 4.75%.
Figure: The U.S. Treasury bond interest rate is comparable to the high point of the U.S. federal funds interest rate
U.S. stock decline will continue. US bonds are the global asset pricing anchor, and the valuation level of US stocks will decline. Stocks will only rise when the growth rate of US corporate profits exceeds the valuation decline. Due to the low risk-free interest rate level in the United States, the current S&P 500 index Shiller PE Ratio has dropped from 36.17 in February to 28.37, but it is still at a relatively high in history. As the Federal Reserve continues to raise interest rates and the US economic recession in 2023, it is expected that US stocks will experience two rounds of decline in valuation and performance.
. A-shares can still get out of the independent market
Although the Federal Reserve continues to raise interest rates, the rise in the US dollar index has led to the depreciation of the RMB. However, it is not the Fed's interest rate hike, but the export pressure formed by the slowdown in economic growth due to the slowdown in interest rate hikes in Europe and the United States. During the Fed's interest rate hike in 2005, A-shares also rose. Another country that cut interest rates Türkiye The stock market trend this year is good. As long as China's economy recovers steadily, it can get out of the independent market.
There are two conditions for the stock market to rise. One is the steady economic recovery or institutional reform to improve corporate performance; the other is monetary easing. From the perspective of M2 growth rate and monetary capital interest rate, the current monetary policy is already in a relatively loose state. The slope of economic recovery has been revised down due to the epidemic and real estate reasons, and the export growth rate in the fourth quarter may decline, so it is weaker than in 2020. Overall, there is no problem with the stock market bottoming out. The social financing exceeded expectations in September to resolve some pessimism and help the stock market stabilize. You can calmly plan the high-quality stock with a low valuation in this position. A rebound requires a catalyst. The bottoming out in April was because the epidemic in Shanghai was gradually under control and the policy of stabilizing growth was gradually implemented. In the future, we need to see whether there are relatively large policies or data positives, such as real estate stabilization, so that A-shares can rebound sharply.
