CITIC Securities has released a research report noting that the US September CPI came in above expectations, with the core month-on-month reading running hot again and a broad range of items showing price increases, meaning inflation has not "fallen back toward target quickly enough." The firm still expects the Federal Reserve to raise rates one more time this year, holding steady in October before delivering another 25bps hike in December.
In an environment of persistently elevated oil prices and lingering inflation stickiness, US financial conditions are unlikely to loosen meaningfully, dollar liquidity is expected to remain tight, Treasury yields have yet to show clear room to decline, gold sentiment remains fragile, and the resilience of fundamentals matters more than the odds on liquidity.
The main views of Citic Securities Company Limited (600030) are as follows:
Key Developments
The US September CPI reading was on the high side. Headline CPI rose 0.6% month-on-month as expected (previous: 0.4%), core CPI rose 0.3% month-on-month (unchanged from the prior reading), headline CPI rose 3.7% year-on-year (previous: 3.4%), and core CPI rose 2.6% year-on-year (previous: 2.4%), with the latter three each exceeding expectations by 0.1 percentage point.
Core Month-on-Month Runs Hot Again, With a Broad Range of Items Raising Prices
Within the 0.6% month-on-month rise in headline US CPI in September, the contributions from energy, food, core goods, and core services were 37.7bps, 0.6bps, 4.7bps, and 22.3bps, respectively, with refined oil product price increases clearly adding to US inflation. The core CPI month-on-month reading has now risen for three consecutive months when measured to two decimal places. Although super core inflation eased slightly to 0.42% month-on-month from 0.51%, the range of items showing price increases in September was broad, which is an unfavorable development. The contribution of the shelter component to the core month-on-month rate rose to 18bps from 11bps, while month-on-month increases in healthcare services, leisure services, transportation services, apparel, used vehicles, leisure goods, and information technology goods all accelerated. The telephone services component, which had previously caused the core CPI month-on-month reading to exceed expectations, saw its month-on-month gain fall to -0.1% from 5.4%, indicating that its price increase was indeed only temporary. Still, two consecutive months of above-expected core month-on-month readings inevitably raise questions about whether the stickiness in US inflation has weakened sufficiently.
US Inflation Has Not Fallen Toward Target Quickly Enough, and the Fed Is Expected to Hike Another 25bps This Year
There is still no clear path to de-escalation in the Middle East conflict, oil prices remain elevated, and core inflation has once again disappointed by running hot, which may reinforce central bank officials' concerns about prolonged high inflation. The firm still expects the Federal Reserve to need one more 25bps hike this year. Judging from remarks this month by FOMC members with voting rights this year, aside from Logan's hawkish view that at least another 50bps of hikes are needed, Jefferson, Williams, Bowman, and Waller have all played down expectations for consecutive rate increases, Hammack has kept an open mind on the pace of hikes, and Kashkari is also open and expects one more hike this year. The firm believes these comments mean the Fed is more likely to stand pat in October and then raise rates by 25bps in December.
Dollar Liquidity Is Expected to Remain Tight, and Fundamental Resilience Matters More Than Liquidity Odds
With Brent crude currently slightly above $100 per barrel, a level neither high enough to generate recession expectations nor low enough to avoid deepening inflation concerns, US financial conditions will find it difficult to loosen meaningfully, and expectations of tighter liquidity are unlikely to weaken notably until at least the next CPI release or greater clarity on the Middle East situation. The firm believes that although Treasury yields jumped after this CPI release and then pulled back, with recent signs of peaking, their downside room has not yet clearly opened. The trading logic for gold remains relatively fragile, and waiting for clarity in the Middle East before positioning on the right side may be the better choice. The dollar index's recent strong performance stems both from rising tightening expectations and from France's fiscal difficulties. The firm does not believe its upward surge will last too long, but sees the possibility of high-level volatility. The recent US equity market rally has been narrow and subject to many disruptions, creating periodic style-rebalancing risks. However, given the considerable resilience of the US economy, US equities remain a major asset class relatively more capable of building consensus, and investors may consider buying on dips after sentiment has been digested.
Risk Factors
The evolution of the Iran situation or other events may have a greater-than-expected impact; overseas economic and inflation performance may exceed expectations; Fed decisions may exceed expectations; and changes in global market liquidity or sentiment may exceed expectations, among other factors.
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