Huachuang Securities has released a research report stating that with US CPI rising further above 4% in May, it is highly probable that May represents the peak for the year-on-year CPI inflation rate in this cycle.
Regarding the Federal Reserve, given that the job market shows no signs of overheating and the economic K-shaped divergence has not narrowed, with inflation potentially having peaked and beginning to recede, the firm maintains its view that the threshold for further rate hikes remains high as long as there is no risk of long-term inflation expectations becoming unanchored. It leans towards the Fed keeping interest rates unchanged for the remainder of the year.
For US equities, if the probability of rate hikes is low, this establishes a floor for the downside risk of macroeconomic policy tightening, leaving industry-specific trends to play out on their own. For US Treasuries, short-term rates are primarily influenced by policy rate expectations; with the current 2-year Treasury yield around 4.1%, the odds of a decline could be significant if no further hikes occur.
Key Analysis from Huachuang Securities
US CPI Continued Its Ascent in May
The year-on-year US CPI broke above 4%, reaching its highest level since April 2023, which was in line with expectations. The headline CPI rose from 3.8% to 4.2% (expected 4.2%), while core CPI increased from 2.8% to 2.9% (expected 2.9%). The median CPI and trimmed-mean CPI both also rose from 2.8% to 2.9%. The month-on-month CPI was 0.5% (expected 0.5%, previous 0.6%), and core CPI was 0.2% (expected 0.3%, previous 0.4%).
Looking at the monthly structure, the increase was primarily driven by energy, with price pressures not spreading broadly. Core goods prices turned negative, the statistical pulse from housing costs subsided, and supercore services price growth moderated, leading core CPI to come in slightly below market expectations.
Firstly, prices for energy-related goods and services continued to rise. Beyond gasoline (6.8%) and airline fares (2.8%), postal service prices (5.2%) were also significantly impacted. FedEx's fuel surcharge is directly linked to spot fuel prices, and the US Postal Service also implemented a temporary 8% fuel surcharge on package services starting April 26th—a historic first—explicitly aimed at coping with rising transportation fuel costs.
Secondly, core goods prices (-0.1%) declined for the first time since June of last year, suggesting the price impact of tariffs may have largely been realized. This month, apart from categories like apparel, personal computers (potentially affected by chip price increases driven by AI demand), household appliances (due to rising non-ferrous metal prices), and alcoholic beverages, prices for furniture and bedding, new vehicles, medical supplies, and other recreational goods all fell. Among 29 major sub-categories of goods, 13 saw price increases this month, compared to 14 last month. The average for 2022-23 was 18, while the 2015-19 average was 12. The report reiterates that, combined with the observed peak and subsequent decline in high-frequency US import prices, the inflationary shock from tariffs on goods is likely mostly reflected.
Thirdly, the rise in oil prices did not lead to a broad diffusion of price increases. The proportion of CPI and core CPI components showing month-on-month price increases in May continued to retreat from the previous month, remaining at low levels seen since 2017.
Following the data release, market expectations for rate hikes changed little, still pricing in one hike this year. Futures market pricing for the number of hikes this year edged up slightly from 1.0 to 1.06.
US Year-on-Year CPI Likely Peaked
It is highly probable that May marks the peak for this cycle's year-on-year US CPI. Firstly, there is a favorable base effect. Starting from June last year, the month-on-month CPI readings gradually increased, averaging 0.3%.
Secondly, given that the price impact of tariffs is largely realized and housing cost growth is returning to its previous trend, and considering the significant K-shaped economic divergence, a job market not in overheating territory, and anchored long-term inflation expectations, core month-on-month inflation may stabilize at a moderate level around 0.2%.
Under these conditions, barring an extreme escalation in Middle East tensions and a significant further surge in oil prices, even if oil prices remain at current levels (providing no additional marginal lift), US year-on-year CPI is expected to gradually decline, though readings may still remain above 3.5%.
For the Federal Reserve, given the absence of job market overheating, persistent economic K-shaped divergence, and inflation likely having peaked, the firm believes the bar for further rate hikes remains high as long as long-term inflation expectations stay anchored. It leans towards the Fed maintaining its current interest rate level for the rest of the year.
For US stocks, a low probability of rate hikes sets a floor for macro policy tightening risks, allowing industry-specific trends to dominate. For US Treasuries, with short-term rates driven by policy expectations and the 2-year yield around 4.1%, the likelihood of a decline appears greater if no further hikes materialize.
Risk Considerations
Geopolitical conflicts and oil price uncertainty.
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