The Federal Reserve's September monetary policy meeting will begin next week. Starting this week, the Federal Reserve has entered its regular 'quiet period'. Related parties believe that the Fed's September interest rate cut is almost a certainty, and market divergence is limited to the magnitude of the cut - whether to cut 50 basis points or 25 basis points at once.
Prior to the Federal Reserve's heavyweight meeting, the US inflation and employment data released this week may reveal the path of interest rate cuts. The year-on-year increases in CPI and PPI in August in the United States were both lower than market expectations, indicating further easing of inflationary pressures in the country and consolidating expectations for a rate cut in September. However, the month on month increase in US core CPI in August was higher than market expectations, indicating that US inflation stickiness still exists, which has significantly cooled down market expectations for a 50 basis point one-time interest rate cut by the Federal Reserve this month.
Institutional insiders believe that the Federal Reserve has the conditions to cut interest rates, but is not in a hurry to cut them quickly, and the path of interest rate cuts may be "stop and go". From a configuration perspective, institutional insiders remind that there is already ample trading in the market regarding the expectation of a Fed interest rate cut, and there may even be overvaluation. In the near future, attention should be paid to structural opportunities in asset allocation.
Core inflation rises beyond expectations
Starting this week, the Federal Reserve enters a 'quiet period' before its September interest rate meeting. The US August inflation and employment data released this week have become important references for the market to judge the path of the Federal Reserve's monetary policy.
On September 11th Eastern Time, data released by the US Department of Labor showed that the US CPI rose by 2.5% year-on-year in August, narrowing the increase by 0.4 percentage points compared to July. This is the smallest increase since February 2021 and lower than market expectations, indicating signs of continued slowdown in US inflation. This latest data, although significantly lower than the high of 9.1% in June 2022, is still higher than the Fed's long-term inflation target of 2%. It is worth noting that after excluding volatile food and energy prices, the core CPI in the United States increased by 0.3% month on month in August, expanding by 0.1 percentage points compared to the month on month increase in July; The core CPI increased by 3.2% year-on-year, exceeding market expectations.
The report released by the US Department of Labor on September 12th Eastern Time showed that the US PPI in August rose by 1.7% compared to the same period last year, the lowest level since early 2024, and lower than market expectations. The PPI in the United States increased by 0.2% month on month in August, while it remained unchanged in July and is expected to grow by 0.1%.
Where does the stickiness of inflation in the United States come from?
Zhang Jun, Chief Economist and Dean of the Research Institute at China Galaxy Securities, stated that according to data from the US Department of Labor, food prices remained stable in August, energy prices experienced a periodic decline, and core commodities continued to experience deflation. The main reason for the unexpected month on month increase in core CPI was the rise in equivalent rent for homeowners in the cost of living.
For the subsequent path of inflation in the United States, many institutional insiders predict that it will continue to move towards the 2% target.
Chen Jiali, a senior macro analyst at Guangfa Securities, said that although there have been twists and turns this year, the overall downward trend of US inflation remains unchanged. Three major factors have formed a downward pull on the inflation center: firstly, the slowdown in income growth has led to a decrease in total demand, guiding the cooling of the job market and a slowdown in wage growth; Secondly, rental prices are still experiencing a cooling and falling trend, although there may be fluctuations in between; The third is an upward trend in supply and inventory centers, with core commodity prices continuing to decline year-on-year. The above three factors will continue to affect the core inflation in the United States, and it is expected that the month on month increase in core inflation in the United States will remain at a level of 0.2% -0.3% within the year. Considering that a steady slowdown in US economic growth is still a high probability event, and the inflation base is declining, it is expected that the core CPI in the United States will slightly fall to around 3.1% by the end of the year, "Chen Jiali judged.
The overall inflation level in the United States may continue to decline, but attention needs to be paid to the potential rebound risk of core inflation, "said He Ning, chief macroeconomic analyst at Open Source Securities. If there is a continuous rebound in US inflation data, the decision-making pressure on the Federal Reserve will significantly increase, so its future focus will also be on core inflation.
According to the latest data from the US Department of Labor, the number of initial jobless claims in the US rose slightly to 230000 in the week ending September 7th, an increase of 2000 compared to the previous week. This is the first rebound in three weeks, reflecting a slight slowdown in the US labor market. Analysts say that currently, due to rising interest rates suppressing economic demand, many companies have reduced their recruitment activities, leading to signs of an overall slowdown in the labor market.
Expectations of a significant interest rate cut may fall through
Federal Reserve Chairman Powell stated in late August that the time has come to cut interest rates. This means that the Federal Reserve has almost made it clear that it will announce a rate cut at its monetary policy meeting on September 17-18.
At that time, the market judged that the Fed's September interest rate cut was almost certain, but the difference was in the magnitude of the cut. Now, institutional insiders generally believe that the inflation stickiness shown by the US inflation data may disappoint the market's expectation of a 50 basis point one-time interest rate cut by the Federal Reserve in September.
Cui Rong, Chief Analyst of Overseas Research at CITIC Securities, stated that against the backdrop of slowing but flawed inflation and cooling but resilient employment in the United States, the Federal Reserve is still in a "risk management" rather than a "crisis response" decision-making framework. While caring for the labor market conditions, it is also necessary to take into account the still sticky price environment and minimize the risk of inflation resurgence. She judged that overall, the Federal Reserve has the conditions to cut interest rates, but there is no need to cut them quickly. It is expected to cut interest rates three times this year, each by 25 basis points.
For the Federal Reserve, a 25 basis point rate cut in September and a 50-75 basis point rate cut for the whole year are neutral judgments, "said Yan Xiang, Chief Economist of Huafu Securities." The downside risk of the US economy is still relatively controllable, and excessive rate cuts could easily trigger the risk of secondary inflation.
Chen Jiali believes that under the neutral assumption, the Federal Reserve will normally initiate a precautionary interest rate cut in September, but there will not be a significant rate cut. It predicts that the Federal Reserve will cut interest rates by 25 basis points in September and 50 basis points throughout the year.
Interest rate cut trading or overvaluation
The market's expectation of the Federal Reserve cutting interest rates has been ongoing for a long time. From an investment perspective, does the logic of interest rate cuts still have investment reference value?
At present, the market has a very sufficient trading volume for interest rate cuts, and there is even overvaluation, "said Xiong Yuan, Chief Economist of Guosheng Securities. If the expectation of future interest rate cuts continues to decline, the US dollar index and US Treasury yields are expected to stabilize and rebound slightly, while gold is facing downward pressure; Although the expected reduction in interest rate cuts may be bearish for the US stock market, this process is also accompanied by a cooling of recession expectations. Overall, the impact on the US stock market is neutral. However, we need to be cautious of seasonal effects and the risk of US stock market adjustment caused by the uncertainty of the US presidential election in September and October.
Xiao Jiewen, a macro analyst at the Research Department of China International Capital Corporation, said that the stickiness of US inflation may lead to a "stop and go" path for the Federal Reserve to cut interest rates. The market has priced the Federal Reserve's interest rate cut by the end of this year at about 100 basis points, but it seems that this pricing may be overly aggressive and there is a risk of adjustment in the future.
Regarding the allocation of major asset classes, Yan Xiang stated that against the backdrop of fully anticipated interest rate cuts, US bond interest rates may fluctuate in the short term, and US stocks may be in the stage of digesting overvalued values in the short term. However, medium - to long-term interest rate cuts will still benefit US stocks; The US dollar may benefit from the resilience of the US economy, with limited downside potential.
Cui Rong suggests paying attention to structural opportunities in asset allocation in the near future. As for US Treasury bonds, the easing of inflation pressure in the US has consolidated expectations of interest rate cuts, and although there are signs of slowing economic growth momentum, it still has resilience. Therefore, the downward potential of short-term bond yields may be greater than that of long-term bonds. As for the US stock market, the market's concerns about the growth momentum of the US economy seem difficult to reverse in the short term, and defensive sector allocation opportunities can be considered. The simultaneous opening of interest rate cutting cycles usually means that the financing burden of enterprises gradually decreases, which may be more favorable for the healthcare industry, which has both capital intensive attributes, defensive characteristics, and ample free cash flow.