CITIC Securities Co., Ltd.: U.S. inflation data in line with expectations, cooling trend in prices continues

According to the latest report from CITIC Securities on the Zhitong Finance APP, the US CPI in July basically met expectations, being a "good data" that is moderate and confirms the trend of cooling inflation once again, opening the door for the Fed to cut interest rates in September. CITIC Securities predicts that the year-on-year inflation rate in the US will stabilize slightly, and does not believe that the rebound in the month-on-month growth rate of housing items indicates a reversal of the cooling trend in rent inflation. CITIC Securities maintains its forecast of two to three interest rate cuts by the Fed this year. US Treasuries may have shown initial value in allocation, and attention can be paid to the potential steepening of the yield curve. In the risk-managed interest rate cut cycle, the performance of the healthcare industry in US stocks can be monitored.

Key Points:

The US CPI in July basically met expectations, with the overall CPI month-on-month growth rate rebounding from the previous -0.1% to 0.2% as scheduled, and the year-on-year growth rate dropping from the previous 3.0% to 2.9% (slightly lower than the expected 3.0%). The core CPI month-on-month growth rate rebounded from the previous 0.1% to 0.2% as scheduled, and the year-on-year growth rate dropped from the previous 3.3% to 3.2%.

The US CPI in July once again confirms the trend of cooling inflation, opening the door for the Fed to cut interest rates in September.

Overall, this CPI report is a moderate and "good data", with both the overall CPI year-on-year and core CPI year-on-year growth rates declining for the fourth consecutive month, reaching their lowest levels since March and April 2021, respectively. This indicates that price pressures in the US continued to ease in July, and inflation stickiness is gradually fading. Specifically:

1. The year-on-year growth rate of food items remained stable at 2.2%, with the year-on-year growth rates of household food items and dining out items both consistent with the previous values, recording 1.1% and 4.1% respectively. Currently, retail food prices in the US have stabilized.

2. Energy prices showed zero growth after seasonal adjustment, mainly due to zero growth in gasoline prices after seasonal adjustment (0.8% increase before seasonal adjustment), a 0.1% increase in electricity prices after seasonal adjustment, and a 0.7% decrease in natural gas prices after seasonal adjustment. The impact of these month-on-month readings on overall inflation is minimal.

3. The year-on-year decline in core commodity prices expanded for the fifth consecutive month to 1.9%, the largest decline since February 2004, reflecting a significant cooling in supply and demand dynamics. After seasonal adjustment, prices of used cars, new cars, clothing, and leisure goods decreased by 2.3%, 0.2%, 0.4%, and 0.3% respectively, while prices of education and communication goods, medical care goods, and furniture increased by 0.4%, 0.2%, and 0.1% respectively. Used cars dragged down the core CPI month-on-month by 5.5bps.

4. The month-on-month growth rate of housing items rebounded from 0.17% to 0.38%, contributing to a 17.3bps increase in the core CPI month-on-month, with the main residence rent (RPR), away-from-home accommodation, and owner's equivalent rent (OER) all showing a slight rebound from June, recording 0.49%, 0.22%, and 0.36% respectively.

5. Excluding housing, the year-on-year growth rate of core services (ex-shelter) dropped from 4.9% to 4.7%, with a moderate 0.21% month-on-month growth rate, once again indicating that the market's previous concerns about "second-round inflation" have not materialized. The month-on-month growth rate of healthcare services has slowed for five consecutive months (July -0.34%), airfare prices have seen negative growth for five consecutive months after seasonal adjustment (July -1.6%), and car insurance prices have increased by 1.2% after seasonal adjustment CITIC Securities expects year-on-year US inflation to stabilize slightly, and the trend of cooling rental inflation is not about to reverse.

On the one hand, the Federal Reserve stated in its Beige Book released in July that almost every regional Fed mentioned that retailers are conducting promotions, price-sensitive consumers are only buying essential goods, there is a downgrade in consumption quality, a decrease in purchase quantity, or purchases are completed after comparing prices from multiple sources. Business input costs are starting to stabilize, which may indicate that the ability and necessity for businesses to raise prices will further weaken.

On the other hand, the supply and demand situation for rental housing in the United States has not become tighter recently. The vacancy rate for rental housing in the second quarter of this year remained at 6.6%, close to pre-pandemic levels. Forward-looking indicators such as year-on-year repeat rents for new tenants and the Zillow Rent Index suggest that there is further room for downward movement in the year-on-year Residential CPI. CITIC Securities does not believe that the rebound in the month-on-month growth rate of the residential component indicates a reversal in the trend of cooling rental inflation.

CITIC Securities maintains its forecast of two to three interest rate cuts by the Federal Reserve within the year.

Recent employment and inflation data may have deviated from the Federal Reserve's "sweet spot" in the past few months but have not left the "comfort zone" (please refer to "July 2024 US Non-Farm Employment Data Review - How to Interpret 'US Recession' and 'Recession Trades'?" 2024-08-03). The soft landing scenario has not been completely disrupted, and the Federal Reserve is still in a "risk management" rather than a "crisis response" decision-making framework. The pace of interest rate cuts may not necessarily need to be drastic; at the same time, the cooling of super-core inflation also means that the current US labor market conditions are unlikely to cause secondary inflation. The existing interest rate level is higher than the neutral rate, and the Federal Reserve has the conditions to cut interest rates and weaken the current policy restrictions. CITIC Securities expects the overall month-on-month PCE price index in the US to rise by 0.09%, with the core index rising by 0.08% month-on-month, and the overall year-on-year increase to be 2.5% with the core year-on-year increase at 2.6%; this is expected to pave the way for the Federal Reserve to start an interest rate cut cycle in September.

US Treasuries may have shown initial value in allocation, and attention can be paid to the potential steepening of the yield curve, while in US stocks, the performance of the healthcare industry during a risk management interest rate cut cycle can be observed.

From the period between the previous US CPI report and the current CPI report, global markets have experienced trading themes of rising recession expectations, spreading risk aversion sentiment, and a reversal of carry trades. In the past month, many stock markets have fallen while the bond market has rallied. However, looking at the net yen positions from CFTC statistics, the rapid reversal of carry trades may be nearing its end, and market sentiment has also calmed down in recent days. It is expected that the market will gradually return to fundamental pricing logic. For US Treasuries, the easing of inflation pressure may boost expectations of loose liquidity, while there are signs of economic growth momentum slowing down but still resilient. Therefore, the potential for short-term bond yield declines may be greater than that for long-term bonds. As for US stocks, the start of an interest rate cut cycle usually means a gradual reduction in corporate financing costs, which is favorable for the healthcare industry with capital-intensive attributes, defensive characteristics, and ample free cash flow. Historically, the healthcare industry has performed well during a risk management interest rate cut process (please refer to "US Stock Strategy Special Topic - The Logic of Current US Stock Trading" 2024-08-12), and attention can be paid to its performance outlook Risk Factors:

Slower-than-expected momentum in US economic growth; Higher-than-expected demand and wage growth in the US job market; Less-than-expected tightening of US financial conditions; Unexpected impact from events such as the US presidential election; Unexpected changes in market liquidity or sentiment