Event: at 21:30 Beijing time on December 10, the United States released the CPI data for November.
Core conclusion: US inflation may have an inflection point in December or January, and then the Fed’s expectation of raising interest rates may cool down.
1. The CPI of the United States continued to rise year-on-year in November, and energy prices remained the biggest driver.
Overall performance: the US CPI without quarterly adjustment in November was 6.8% year-on-year, in line with expectations, higher than the previous value of 6.2%, the highest since 1983; Core CPI was 4.9% year-on-year, in line with expectations, higher than the previous value of 4.6%, the highest since 1992.
In terms of sub items: energy and used cars are still the two sub items with the largest increase, up 33.5% and 31.4% respectively year-on-year, 3.5 and 5.0 percentage points higher than the previous value respectively; Food items increased by 6.1% year-on-year, 0.8 percentage points higher than the previous value; The service items increased by 3.4% year-on-year, 0.1 percentage point higher than the previous value.
2. Why is inflation at a record high, but the US dollar index and US bond yields are falling?
Since the beginning of 2021, almost every month’s US CPI has been higher than market expectations year-on-year, and has continuously hit a new high in the past few decades, leading to increasing inflation panic. In this context, “in line with expectations” means “less than expected”, that is, even if inflation is still rising, as long as it does not exceed expectations, the market will think that the inflationary pressure is about to ease. The typical representative is that from July to September this year, the actual CPI data is not different from the consensus expectation of the market, inflation concerns are temporarily relieved, and the yield of 10Y US bonds decreased from 1.5% to 1.2%. However, since the beginning of October, due to the failure of OPEC + to expand production and the European natural gas crisis, energy prices have continued to rise sharply, leading to renewed inflation concerns.
After the US CPI data were released, the US dollar index fell rapidly from 96.4 to about 96.0; The yield of 10Y US bonds fell from 1.52% to the lowest 1.45%, and finally closed at 1.49%; The number of interest rate increases implied by the federal funds rate futures in 2022 fell from 2.9 to 2.66. This performance of asset prices and interest rate increase expectations reflects the logic of “meeting expectations”, that is, “less than expectations”.
3. To judge the impact of inflation, we need to clarify the relationship between real inflation, inflation expectation and interest rate increase expectation.
Generally speaking, inflation expectation and interest rate increase expectation follow the change of real inflation, but they only reflect immediate inflation and do not include the judgment of long-term inflation trend. Regardless of the implied market inflation expectations of US bonds (interest rate spread between US bonds and tips) and consumer inflation expectations surveyed by the New York Fed are highly consistent with the year-on-year trend of us CPI. At the same time, the interest rate increase expectation implied by interest rate futures is highly consistent with the inflation expectation implied by US bonds. In fact, Bloomberg’s latest consensus expectation shows that the market expects us CPI to fall to 2.6% and PCE inflation to fall to 2.3% in 2022q4, Core PCE inflation will fall to 2.5%, which is close to the calculation in our annual overseas report. If it is believed that inflation will continue to fall to just slightly higher than the Fed’s policy target, it should not be expected to raise interest rates nearly three times in 2022. This reflects that the interest rate increase expectation implied in interest rate futures more reflects the performance of immediate inflation. Once inflation begins to fall, the interest rate increase expectation will also begin to cool down.
4. US inflation may turn around in December or January, and then the Fed’s expectation of raising interest rates will cool down.
U.S. inflation trend: in the previous report, we have repeatedly pointed out that U.S. inflation is “the direction determined by energy sub items and the range determined by other sub items”. In addition, crude oil prices are ahead of CPI energy sub items from January to February. According to our analysis in the overseas annual report “year of reversal – Overseas macro outlook for 2022”, the crude oil price probably fell in 2022. In fact, the oil price has fallen by more than 13% since early November. Based on the price since December, the oil price has dropped to 44.3% year-on-year from 101.7% in October. Therefore, U.S. inflation may have an inflection point in December or January next year, and then continue to decline, which is expected to fall to 2-3% by the end of 2022.
Federal Reserve monetary policy: judging from the recent statements of Powell and other Federal Reserve officials, the Federal Reserve is likely to announce the acceleration of taper at the FOMC meeting on December 16, and increase the scale of debt reduction from 15 billion to 30 billion from January next year, so as to end bond purchase in March 2022. However, we believe that this does not mean that the pace of interest rate increase will be further accelerated. With the peak decline of US inflation, the continuous slowdown of the economy and the impact of Omicron virus, our neutral expectation is still to raise interest rates once in 2022. If inflation falls slowly and the employment situation improves beyond expectations, it is not ruled out that interest rates may be raised twice. In contrast, At present, the market pricing for raising interest rates more than twice is somewhat too high. After the inflection point of US inflation, the market’s expectation of raising interest rates will probably cool down.
Asset price outlook: maintain the view of our overseas annual report: the US dollar index is likely to rise in 2022, and the high point may break 100; The nominal interest rate of US bonds is more likely to moderate downward, but the real interest rate may rise; After the inflection point of US inflation, the gold rate probably returned to the downward channel; U.S. stocks are mainly subject to shock adjustment, which is difficult to continue to rise sharply.
Risk tip: US inflation continues to exceed expectations, and the Fed’s policy stance changes beyond expectations.
