CITIC Securities Co., Ltd.: U.S. September CPI reading exceeds expectations across the board, the battle against inflation has not yet been won

According to the latest report from CITIC Securities on Zhitong Finance APP, the overall CPI reading in the United States in September exceeded expectations across the board. This is not highly correlated with the recent strike by American port workers, but it does reflect that the U.S. anti-inflation process is not yet over. The overall CPI year-on-year increase in this round was narrowed to the lowest level since February 2021, affected by the decline in oil prices and base effects. Rent inflation has returned to a cooling trend, while prices of food, core goods, and core services excluding housing rebounded month-on-month. It is expected that the overall CPI in the United States in the fourth quarter of this year will be difficult to continue to decline year-on-year, but the risk of secondary inflation is relatively low. It is still expected that the Federal Reserve will cut interest rates by 25 basis points twice this year. The steepening potential of the U.S. bond yield curve is favored, maintaining the preference for U.S. stocks over U.S. bonds in asset allocation.

Key Points:

The overall CPI reading in the United States in September exceeded expectations across the board, with the overall CPI month-on-month growth rate remaining at 0.2% (expected 0.1%), and the year-on-year growth rate dropping from the previous value of 2.5% to 2.4% (expected 2.3%). The core CPI month-on-month growth rate remained at 0.3% (expected 0.2%), and the year-on-year growth rate increased from the previous value of 3.2% to 3.3% (expected 3.2%).

Key Views from CITIC Securities:

The U.S. anti-inflation process is not yet over.

The year-on-year increase in the overall CPI in the United States in September was the lowest since February 2021, mainly due to the decline in oil prices and base effects. Among them, commodity prices fell by 0.2% month-on-month, while service prices rose by 0.4%. The overall reading exceeding expectations indicates that the anti-inflation process in the U.S. is not over, reducing the probability of the Federal Reserve continuing to cut interest rates by 50 basis points this year. The unexpected inflation reading is less correlated with recent market concerns such as the strike by American port workers and other supply chain events, as the strike occurred only in early October and the global commodity supply chain is not currently tight. Specifically:

1. Food items may be one of the sub-items leading to the overall inflation exceeding expectations. Its month-on-month growth rate rebounded from 0.1% to 0.4%, the highest since January this year, with family food and dining out items rising by 0.4% and 0.3% respectively.

2. The year-on-year decline in energy prices widened from 4.0% to 6.8%, the lowest since July last year. The main reason is that gasoline prices fell by 4.1% seasonally adjusted (5.1% before seasonal adjustment), while electricity and natural gas prices both turned positive after seasonal adjustment, with increases of 0.7% each.

3. Core goods increased by 0.2% month-on-month, returning to positive growth after six months. Among them, clothing, used cars, and new cars prices rose by 1.1%, 0.3%, and 0.2% respectively, while home furnishings remained flat month-on-month. Medical care goods, education and communication goods, and leisure goods all fell by 0.7%, 0.7%, and 0.3% respectively.

4. Housing rose by 4.9% year-on-year, the smallest increase since February 2022, with the month-on-month contribution to core CPI dropping from 23.8 basis points to 10.2 basis points. This is consistent with the judgment that rent inflation can continue to cool down. Main housing rent, equivalent rent for owners, and away-from-home accommodation all decreased compared to the previous values, recording 0.3%, 0.3%, and -1.9% respectively

5. Excluding housing, the month-on-month growth rate of core services (ex-shelter) increased from the previous value of 0.24% to 0.55%, mainly due to the rebound in transportation and medical services. Among them, airfare prices and car insurance prices recorded relatively high month-on-month increases of 3.2% and 1.2% respectively, while the price of healthcare services increased from the previous value of -0.1% to 0.7% month-on-month.

It is expected that the overall CPI in the United States in the fourth quarter of this year will be difficult to continue to decline year-on-year, but the risk of secondary inflation is relatively low.

On one hand, under the disturbance of geopolitical events, the trend of energy prices continuing to fall beyond the seasonal trend in the past few months has shown signs of easing recently. At the same time, the fading base effect may support a slight rebound in the overall CPI year-on-year in the fourth quarter of this year. On the other hand, the strong non-farm report at the beginning of this month and the strike by U.S. port workers have once again raised concerns among some investors about the risk of secondary inflation in the United States. However, it is still believed that in an environment where the supply chain operates smoothly, the labor market continues to rebalance, household consumption behavior becomes more practical, and the tight housing supply situation does not worsen, the core inflation center is unlikely to move significantly higher, and the risk of secondary inflation remains relatively low. Therefore, it is still expected that the Federal Reserve will cut interest rates by 25bps twice this year, optimistic about the steepening potential of the U.S. bond yield curve, and maintain the asset allocation preference order of U.S. stocks outperforming U.S. bonds.

Risk Factors:

Stronger-than-expected momentum in U.S. economic growth; Demand and wage growth in the U.S. job market exceeding expectations; Less tightening in U.S. financial conditions than expected; Unexpected impacts of events such as the U.S. presidential election; Unexpected changes in market liquidity or sentiment