Focus this week:
In December, the CPI of the United States increased by 7% year-on-year, the previous value was 6.8%, and the market expectation was 7.1%; CPI increased by 0.5% month on month, the previous value was 0.8%, and the market expectation was 0.4%;
Core CPI increased by 5.5% year-on-year, the previous value was 4.9%, and the market expectation was 5.4%; Core CPI increased by 0.6% month on month, the previous value was 0.5%, and the market expected 0.5%.
As of the closing on January 12, the yield of 10-year US bonds had decreased slightly by 2bp, and the stock index rose across the board. The S & P 500 index rose 0.3%, the NASDAQ index rose 0.2% and the Dow Jones industrial index rose 0.1%.
Core view:
The CPI of the United States in December was slightly lower than expected, falling for the second consecutive month, with residential items, new cars, used cars and trucks as the main contributions. Supply chain problems have improved to ease inflation pressure. It is expected that inflation will peak in the first quarter of 2022 and tend to fall later.
Based on the unsustainability of inflation, the long-term inflation expectation is still at a reasonable level, and the employment and economic repair are still in progress, it is expected that the pace of interest rate increase by the Federal Reserve may be slower than market expectations, and the time point of interest rate increase is later than expected. If the subsequent inflationary pressure slows down, the expectation of accelerating interest rate hike will fail, and the US bond yield is expected to be low before and high after 2022.
Inflation pressure eased and CPI continued to fall month on month. The US CPI in December was slightly lower than expected, falling for the second consecutive month, indicating that the inflationary pressure is slowing down. Housing, used cars and trucks, and new cars are the main contributions. Due to the impact of Omicron, energy prices changed from positive to negative month on month. Looking ahead, the supply chain tightening problem is gradually alleviated, and the imbalance between supply and demand is further improved. In addition, the support of energy prices for CPI is limited and unsustainable. Inflation is expected to peak in the first quarter of 2022, easing the pressure on the Federal Reserve to accelerate interest rate hikes.
The Fed may raise interest rates at a slower pace than expected. We believe that the pace of the Fed's interest rate hike may be weaker than expected for three reasons. First, the sustainability of US inflation is poor, and the fall in inflation in the later stage reduces the pressure on the Federal Reserve to accelerate interest rate hike. Second, the US long-term inflation expectation is still at a more reasonable level. Third, it will take time to repair the economy and the job market, which does not constitute a condition for the Federal Reserve to accelerate interest rate hikes.
US bond yields are expected to be low before and high after. If the inflationary pressure slows down, the expectation of accelerating interest rate hike will fail. It is expected that the US bond yield may be low before and high after 2022. The nominal yield of US debt can be divided into real yield and breakeven inflation (usually as a measure of long-term inflation expectation), which are mainly determined by economic fundamentals, inflation and monetary policy.
In the first half of the year, under the background of weakening inflationary pressure, the pace of interest rate hike by the Federal Reserve may slow down, the expectation of accelerated interest rate hike by the market failed, and the upward space of US bond yield is limited. However, in the second half of 2022, under the background of continuous economic recovery and further approaching to the maximum employment in the labor market, the intensity of the Fed's monetary policy turn to Eagle increased, guided the market's expectation of raising interest rates and supported the strengthening of US bond yields
