CITIC Securities: Has the downturn in US inflation repeated its twists and turns? How much room is left for the Federal Reserve to cut interest rates?

The Zhitong Finance App learned that CITIC Securities released a research report saying that the US CPI is expected to rise to 2.8% year on year by the end of the year, and the core CPI is 3.2% year on year. US food inflation may face phased pressure, and the upward risk of US energy inflation is limited. The month-on-month growth rate of US core commodity inflation may fluctuate around zero growth rate, and there may be some stickiness in core service items. The probability of cutting interest rates by 25 basis points in November is high, and there is still room to cut interest rates by 50 bps during the year. In the short term, the risk of rising interest rates on short-term US bonds is limited, and interest rates on long-term US bonds may fluctuate widely.

CITIC Securities's main views are as follows:

Affected by the weather and policy changes in some countries, food prices have recently risen month-on-month. In the future, the US food CPI may face phased month-on-month growth pressure.

In September, the CPI for the US food item rose to 0.4% month-on-month, the highest value in 8 consecutive months. Global cereal prices have risen due to factors such as concerns about unfavorable weather conditions in some food-exporting countries. At the same time, due to supply-related policies in some countries, the FAO meat, sugar, etc. price indices have also recently shown month-on-month increases. The month-on-month rise in food prices may drive the subsequent gradual month-on-month growth pressure on the US food CPI.

US energy inflation continues to cool down. Due to OPEC+'s recent announcement of an increase in production, there is limited room for energy prices to rise if the situation in the Middle East does not escalate further.

The recent negative month-on-month increase in US energy CPI may be compounded by the continued high level of US crude oil production compounded by a decline in global crude oil demand expectations. Since the conflict between Iran and Israel intensified in early October, global concerns about oil supply have intensified, and oil prices have risen sharply in early October. However, OPEC+ stated after the supervisory committee meeting in early October that it plans to increase production by 180,000 barrels per day starting in December. Recently, with the gradual clarification of the situation in the Middle East, oil prices have fallen again. Considering the uncertainty of global economic recovery and the pressure of OPEC+ production increases on crude oil prices, if geopolitical risks do not exceed expectations, the risk of future energy price increases is limited.

Inflation in core commodities is likely to fluctuate around zero growth rate.

The CPI for new car items has been negative for six consecutive months. It is expected that the current state of sufficient supply and sluggish demand in the new car market will put downward pressure on new car prices. It is expected that the CPI growth rate of new cars will fluctuate around zero month-on-month during the year. At the same time, although used car inventories are tight, consumers seek low-cost cars in an environment with high interest rates, so the CPI growth rate for used cars and trucks may also stabilize around zero month-on-month. Overall, there is a high probability that US core commodity inflation will fluctuate around zero growth during the year. Even if there is upward pressure, it is expected to be moderate.

Regarding core services, the rate of decline in US wages has recently slowed, but considering that the pressure on wage growth is lagging and that the growth rate of housing inflation will slow month-on-month, the risk that the short-term core service growth rate will rise sharply over the same period last year is low.

Wage growth has been slowing down recently. The average hourly wage growth rate has leveled off compared to recent years, and the downward slope of salary growth rates for job-seekers and those left behind is also slowing down. The pace of decline in wage growth may lag behind the growth rate of core service inflation, and considering the current month-on-month slowdown in housing inflation, housing prices are still on a downward trend. The year-on-year rent growth rate only rebounded slightly after falling sharply from 2022 to 2023. The risk of a sharp rise in short-term core service growth is expected to be low.

Overall, the CPI is expected to rise to about 2.8% year on year by the end of the year, and the core CPI may be about 3.2% year over year.

Although the CPI growth rate of core commodities is expected to fluctuate around zero during the year, due to phased inflationary pressure in the US food items, it is difficult for the CPI for energy items to contribute greatly to the year-on-year decline in CPI. Core service items may have some stickiness, but the risk of a sharp rise in the year-on-year growth rate of core services in the short term is low. There is a risk of a year-on-year increase in CPI. At the end of the year, CPI may rise to about 2.8% year over year, there may be limited room for core CPI to decline year over year, and core CPI may be around 3.2% year on year at the end of the year.

The risk of rising interest rates on short-term US bonds is limited. Interest rates on long-term US bonds may fluctuate widely. We need to pay close attention to further disclosure of important US economic data in the future.

As the US employment data for September exceeded expectations and improved, the decline in the September inflation data fell slightly short of expectations. Combined with continued hawkish statements from Federal Reserve officials in October, market expectations for interest rate cuts have cooled down, leading to a sharp rise in interest rates on long-term US bonds recently, and interest rates on 10-year US bonds have once again reached 4%. The southeastern hurricane caused a sharp rise in the number of first-time jobless claims in the first week of October. The weather is expected to affect the October non-farm payrolls data disclosed next month. Considering that the risk of US inflation is relatively manageable in the short term, the probability of cutting interest rates by 25 basis points in November is high. There is still room for 50 bps interest rate cuts during the year, and the market has adjusted interest rate cut expectations sufficiently. In the short term, interest rates on long-term US bonds may fluctuate widely in line with the disclosure of economic data, and the risk that interest rates on short-term US bonds will rise further is limited. We need to pay close attention to the US GDP data for the third quarter to be disclosed at the end of October. The economy in the third quarter exceeds expectations and may cause treasury bond interest rates to fluctuate at that time.

Risk factors:

Changes in the US economy have exceeded expectations; US monetary policy has exceeded expectations; geopolitical risks have exceeded expectations, etc.