Inflation heats up beyond expectations, is this time different?

The inflation announced last night in the United States showed signs of resurgence in September. Although the downward trend remains unchanged, both the overall and core inflation rates exceeded expectations by 0.1% on a month-on-month and year-on-year basis (2.4% overall, 3.3% core). In the face of the soaring number of initial jobless claims (reaching a 14-month high of 253,000 for the week), the market seems skeptical this time, with the US dollar index and US dollar interest rates both rising before falling back.

We use a chart to observe the information implied by this inflation:

• Year-on-year cooling is confirmed, dropping from the previous value of 2.5% to 2.4%, while the month-on-month cooling (maintaining 0.2% for three consecutive months) encounters resistance.

• The main contributing factor is energy, with crude oil prices leading the decline in the third quarter (with the deepest drop of 20%), while commodity and food prices are showing an upward trend.

• Core inflation, especially super core inflation (4.6% year-on-year), remains high, echoing the wage growth in non-farm data, far from declaring victory against inflation.

• With the rise in oil prices in October under the Middle East crisis, almost recovering the decline in the third quarter, be cautious about inflation resilience.

Federal Reserve officials have come out to reassure the market, stating that they are not worried about inflation rebounding. This is because the numbers are still trending downwards, and it is difficult for them to admit that their job is not well done (having repeated the same mistakes last year), leading them back to the boring old path. However, regarding interest rate cuts, they will inevitably be more cautious, with the market pricing in two rate cuts by the end of the year as the basic scenario.

Atlanta Federal Reserve Bank President:

"Perhaps we should pause the rate cut in November. I am absolutely open to this. If the data turns out as I expect, I am willing to take no action at one of the last two meetings."

Since the market had already priced in the CPI exceeding expectations for this release, the US dollar index had been rising for 9 consecutive days before yesterday. Therefore, after the data was released, the market did not show the expected reaction, and the US dollar index encountered resistance around 103 and fell back. Non-US currencies have gradually found support, with the euro supported around 1.09, and the US dollar facing strong resistance against the Japanese yen at the important level of 150.

From now until the end of October, the market may remain in a range-bound, narrow trading range. From a technical perspective, there is also significant resistance above the US dollar index (around 103, the integer level, and the 100-day moving average at 103.25), possibly entering a consolidation phase until the US dollar's next direction is determined after the November 5th election

Considering there will be another non-farm payroll report before the November meeting, the market is considering the risk of no rate cut in November (although less than 10%). However, the overall rate cut process has not been interrupted. Rather than worrying about a resurgence of inflation, the market is more concerned about the risk of stagflation, as new unemployment and non-farm data contradict each other, casting doubt on the health of the US job market.

Recently, there is a popular saying about a "financial war". As A-shares and foreign sentiment improve, the reversal and frequent revisions of important US data have brought the fear of a strong dollar to the forefront. In fact, this saying cannot be proven or refuted, and it is not really helpful in guiding trading decisions, just listen to it.

Regarding the Renminbi, with the US September CPI behind us, the trading theme has once again shifted to the domestic market. This Saturday morning, the market has some expectations for the 2 trillion policy stimulus discussed at the Ministry of Finance meeting. Considering the meeting is tomorrow, from an expectation perspective, it will provide support for the Renminbi today, with 7.08-7.09 being a good short-term exchange rate level. However, with risk events including the election gradually approaching, coupled with overall strong US data, it will be difficult for the Renminbi to return to the market before the holiday. Overall, in the short term, it is expected to fluctuate in the range of 7.04-7.08.

Author: Li Haoran, Source: Morning Market, Original Title: "Inflation Warms Up Beyond Expectations, Is This Time Different?"