United States: Inflation remains high, but risks unchanged
In January, the U.S. Consumer Price Index (CPI) rose by 0.3% month-on-month, expanding by 0.1 percentage points from December, marking the largest increase since September of the previous year. On a year-on-year basis, it rose by 3.1%, well above the Federal Reserve’s long-term inflation target of 2% and higher than the market’s general expectation of 2.9%. Excluding the volatile prices of food and energy, the core CPI rose by 0.4% month-on-month, with an increase of 0.1 percentage points from the previous month, and a year-on-year increase of 3.9%. The year-on-year increase in core CPI for January remained unchanged from the previous month.
Reviewing the past three months of U.S. CPI data, the recently disclosed January CPI data indeed reflects the resilience of U.S. inflation, especially the slow decline in core CPI. In previous reports, we judged that Powell’s “confidence” in the prospects of inflation decline would likely require CPI to drop to around 2.5%. Given the current pace, with January CPI not falling below 3%, there is only one data point left for the March FOMC. Solving 0.6 percentage points within a month may be a low-probability event. If there is no interest rate cut in March, the next opportunity for a rate cut will be in May. The January CPI data led us to abandon the previous judgment of an interest rate cut in March. After the disclosure of U.S. CPI data, the market experienced a rapid adjustment in a single trading day, with the U.S. dollar index surging to around 104.5, the yield on the ten-year Treasury bonds reaching 4.3%, and the Nasdaq retracting by 1.8%. Subsequently, the market entered a period of oscillation. However, the U.S. dollar index did not continue to strengthen, possibly indicating that 104.5 is the peak of this round of the U.S. dollar index. Our judgment before the Spring Festival was that there would be a period of oscillation in the coming weeks, and we took the correct step of reducing positions.
From Federal Reserve Chairman Powell to FOMC members, they expressed their views on the data, which can be summarized into three points:
1) The January CPI data is still relatively high, but there is no upward risk.
2) The Federal Reserve may not cut interest rates in March.
3) Whether the Federal Reserve waits until May to cut interest rates too slowly needs to wait for data validation, meaning the Federal Reserve has enough confidence that the economy will not experience an overall decline from March to May.
We will focus on the quarterly report and interest rate guidance report of the Federal Reserve in March to determine how many interest rate cuts there will be in 2024. The current judgment is three times in the whole year, each time by 25 basis points, for a total of 75 basis points.
China: Policy effects show lag
Before the Spring Festival, two important pieces of data were released. First, the year-on-year decline in January CPI was 0.8%, expanding by 0.5 percentage points from the previous month, although core inflation remained stable. The continued expansion of the year-on-year decline in January CPI is not a particularly good signal for the overall economy. We can say that a series of macro-control measures implemented since January 22 may have landed behind the market curve. Due to the inherent lag in macro-control, the latest data shows that price factors continue to weaken, indicating the possibility of a significant macro-control in March, especially with the two sessions scheduled for March. The economic growth target and deficit ratio for 2024 set at the two sessions can guide market expectations. However, when the market cannot find a bottom, this expectation is challenging to lead. The sharp decline in stock prices before the Spring Festival has already reflected the panic sentiment in the entire national economy. This sentiment may need to see substantive progress in data rather than verbal regulation.
In contrast to January prices, financial data shows an overall unchanged pattern. M1 growth remains slow, but social financing growth has improved, with a large year-on-year increase. Analyzing the data, social financing is mainly driven by a significant year-on-year increase in corporate bills and corporate bonds, but overall societal demand for loans is still relatively weak. For the central bank, in the absence of the ability to cut interest rates on a large scale, how to promote the entire financial system to lend externally may be a challenging task. Obviously, the structural interest rate cuts and comprehensive reserve requirement ratio cuts conducted by the central bank on January 25 and February 5 respectively may need to wait until March for their effects on social financing to be demonstrated. Referring to research materials from the Federal Reserve, we may find that lowering the cost of funds alone may be difficult to boost the recovery of social financing. Ultimately, more proactive fiscal actions may be needed. Therefore, the macro deficit ratio at the two sessions in March will be a crucial piece of data. After adding to the fiscal budget in 2023, the central fiscal deficit ratio reached 3.8%, and such a high fiscal deficit ratio has not yet formed an effective market bottoming signal. Further increasing the deficit ratio may be necessary in 2024. Looking at it this way, the exchange rate of the renminbi may face a challenging period in March to May.
Another point worth noting is that after the replacement of the chairman of the China Securities Regulatory Commission, a series of actions were taken to boost market confidence, including penalizing securities firms, accounting firms, and individuals, demonstrating a relatively strong attitude in protecting investor rights. Looking at the Hong Kong stock market, the market’s response is generally positive, presenting a relatively favorable confidence. In the future, the market may be more willing to see adjustments to market rules by the China Securities Regulatory Commission.
