U.S. Stocks And U.S. Treasury Markets were Relatively Calm After the Data was Released
The US June CPI disclosed overnight was 5.4% year-on-year and 0.9% month-on-month, both significantly exceeding market expectations and higher than the 5% and 0.8% in May.
However, the U.S. stocks and U.S. Treasury markets were relatively calm after the data was released. After midday, the U.S. Treasury interest rate also jumped significantly to more than 1.4% after a correction from a high level. Investors are more concerned about the driving force behind the inflation data and the potential impact on future monetary policy and market trends.
Since May was a low base year-on-year last year, the market generally expects that inflation in June will fall slightly from the May peak under the normal month-on-month growth rate (the market is expected to be 4.5%), but the actual month-on-month rise of 0.9% will be 6%. The monthly CPI rose year-on-year to a high of 5.4% year-on-year. It has to be said that from a month-on-month perspective, on the basis of the 0.8% month-on-month ratio in May, it further climbed to 0.9% in September. This increase is very significant. It is important to know that the US long-term historical average CPI month-on-month ratio is only about 0.2%.
Second-hand cars and travel-related services are still the most important contributions.
June used car prices jumped 10.5% month-on-month, contributing one-third of the June CPI growth rate. The lack of chips and other factors caused supply constraints to remain the main bottleneck. In addition, air tickets, hotels, and other services related to travel needs after the epidemic has been repaired and opened have also increased significantly. For example, the price of air tickets in June was 2.7% month-on-month (7% in May), which is in line with our continuous follow-up in the epidemic and resumption weekly report The progress of opening up in the United States and the expectation of further release of service demand under the full opening of the United States are basically the same. In fact, the number of U.S. TSA security screenings has continued to climb in recent months and once approached the level of 2019.
Secondly, in terms of market reaction, the US stock and US bond markets were relatively calm at the beginning after the data was released, and volatility increased after midday. Such exaggerated price data makes the market think it is unsustainable.
After the CPI inflation data was released in the early inventory, the U.S. stocks and U.S. bond markets were basically “unmoved.” The 10-year U.S. bond interest rate surged and fell, and the Nasdaq index also opened low and moved high, but continued to rise. We believe that, in addition to the fact that the first batch of US stocks to disclose their performance in the second quarter performance period, several banks (such as Goldman Sachs, JP Morgan, etc.) are generally much better than expected, it may also indicate that investors generally believe that such “exaggerated” data is just the opposite. Unsustainable (for example, used car prices have increased by as much as 45% year-on-year).
However, this situation took a turn for the worse after midday. The Treasury Department’s 30-year Treasury bond auction results were obviously weak, which pushed interest rates on Treasury bonds generally higher, and 10-year U.S. Treasury bonds also jumped ~6bp to 1.42%, which in turn induced the U.S. stock market, especially Nasdaq Fluctuations.
Iii. Thirdly, looking forward, June’s higher-than-expected inflation data has partially changed the future path of inflation, and service prices are still the focus of attention.
Such a high month-on-month growth rate in June has partially changed the inflation trend that we originally expected to marginally fall from the year-on-year high in May (according to the current path, even if it is 0.2% month-on-month, the year-on-year year-on-year rate will exceed the current level). If the month-on-month ratio remains high, the carryover of U.S. inflation in the fourth quarter will be very obvious, and the tightening of monetary policy at that time will also increase, or at least the expected intensity. Although the inventory and supply bottlenecks of some commodities such as second-hand cars are still difficult to be completely relieved in the short term, considering the trend of service consumption and commodity consumption declining, we believe that service prices should still be the main focus.
However, whether the Fed‘s monetary policy will be changed immediately in the short term, we think it is somewhere between the two. In other words, short-term prices are already like this, and the need for immediate action depends mainly on how the Fed judges. For example, if the price of the used car that drives the most this time is eliminated, the month-on-month ratio will drop to about 0.6%, which will also be lower than the May level.
Therefore, from a market perspective, Powell’s hearing on the semi-annual monetary policy report in Congress on Friday and the FOMC meeting at the end of July will be the key for the market to find clues about the Fed’s statement. Prior to this, we temporarily maintain the judgment of the path suggested by August to September and start the reduction at the end of the year. At the same time, the second quarter performance period of the U.S. stock market will also be the focus of attention in the next few weeks. We expect it will be under the background of low base and growth recovery. Have a strong performance.