Source: From Snowball
United States CPI
Column: Recent tensions in the Middle East have increased the risk of further rally in crude oil. At the same time, the owner's equivalent rent (OER), which has the most impact in the housing CPI, may bottom out in September and October with the year-on-year housing price increase, and the year-on-year may usher in a rebound in the coming months. Our forecast model shows that current or higher crude oil price levels will lead to another year-on-year increase in United States CPI in the fourth quarter.
United States CPI and core CPI recorded 2.4% and 3.3% year-on-year respectively in September, both higher than expected. The year-on-year deflation of core goods narrowed, becoming the main source of CPI exceeding expectations. In addition, food and beverage also accelerated slightly year-on-year. Core services and energy were lower year-on-year. After the release of the data, the market expects two more 25bp rate cuts this year, to 3.5% in 2025, and the market expects to move closer to the Fed's September dot plot.
Looking ahead, under the baseline scenario of 0.2% QoQ growth, both CPI and core CPI will rebound modestly in the fourth quarter. The current market is more focused on the United States labor market, and if the employment data continues to perform stronger than expected, or the situation in the Middle East leads to a surge in crude oil prices, it may trigger a further convergence of market interest rate cut expectations. In the medium term, considering that the United States inventory cycle is about to turn into the stage of active destocking, the main line of macro trading in the coming year is still the game around the risk of recession in the United States, and the theme of stagflation may be traded in stages.
Column: Focus on the rebound in energy and housing inflation
The reason why the United States CPI exceeded expectations in September was mainly due to the year-on-year recovery in core goods inflation, especially the significant narrowing of year-on-year deflation in transportation goods. However, judging from the second-hand car price index, there is limited room for further narrowing of the deflation of transportation commodities in the next two months, which is not enough to continue to push up inflation. What needs to be watched in the coming months is the potential upward pressure on energy and housing inflation.
In terms of energy prices, the year-on-year deflation of energy prices widened in August, which did not reflect the impact of the intensification of geopolitical conflicts in the Middle East on energy prices. After entering October, United States gasoline prices have rebounded significantly year-on-year, which will directly raise the price of motor fuel, which accounts for a relatively high proportion of CPI (3.35%). In the future, it is necessary to pay attention to whether Israel and Iran enter a cycle of mutual escalation and retaliation, which will further deteriorate the situation in the Middle East.
In addition, although the housing CPI cooled significantly in September, the owner's equivalent rent (OER), which has the greatest impact in the housing CPI, may rebound in the coming months as house prices bottom out in September and October.
We simulate the Q4 CPI path under several different crude oil price pivots: (1) the situation in the Middle East has deteriorated significantly, directly affecting crude oil exports, and the crude oil price pivot has risen to $90 per barrel; (2) The situation in the Middle East remains tense, and crude oil prices remain at the current pivot of $75 per barrel; (3) The situation in the Middle East eased, and crude oil prices fell back to the September $68/barrel center. Our forecast model is significant, unless crude oil prices fall back to the mid-September pivot level, at current or higher price levels, which will lead to another year-on-year increase in Q4 CPI.
1. September CPI data
United States CPI in September was 2.4% year-on-year, higher than the expected 2.3% and lower than the previous value of 2.5%; Core CPI was 3.3% year-on-year, higher than the expected value and the previous value of 3.2%. From the perspective of elastic and sticky CPI, elastic CPI rebounded year-on-year, and sticky CPI decreased steadily and slightly. The year-on-year deflation of core goods narrowed, becoming the main source of CPI exceeding expectations. In addition, food and beverage also accelerated slightly year-on-year. Core services and energy were lower year-on-year. The year-on-year acceleration of the CPI sub-item increased compared with August, but the overall proportion was less than 50%. The proportion of high-growth sub-items was the same as in August. After the release of the data, the market expects two more 25bp rate cuts this year, to 3.5% in 2025, and the market expects to move closer to the Fed's September dot plot.
The PCE in August fell to 2.24% year-on-year, but the core PCE rebounded slightly to 2.68% year-on-year, mainly driven by the narrowing of deflation in durable goods, especially automobile-related goods, and the year-on-year rebound in service consumption such as medical care, transportation, food and accommodation.
Second, the outlook for the market
The month-on-month growth rate of CPI and core CPI in September was 0.2% and 0.3% respectively, as we judged before, it is difficult for CPI to maintain a low growth rate below 0.2%. Under the baseline scenario of 0.2% QoQ growth, both CPI and core CPI will recover modestly in the fourth quarter, which is consistent with the model forecast above. However, the moderate recovery in CPI is unlikely to shake the market's expectations of interest rate cuts, at most consolidating the market's expectations for two more 25bp rate cuts this year. The current market is more focused on the United States labor market, unless the employment data continues to perform stronger than expected, or the situation in the Middle East causes crude oil prices to soar, which may trigger further convergence in market interest rate cut expectations. At the same time, considering that the United States inventory cycle is about to turn into the stage of active destocking, the main line of macro trading in the coming year is still the game around the risk of recession in the United States, and the theme of stagflation may be traded in stages.
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