Before starting the preview of tonight's US CPI data, we invite investors to take a look at two charts:
The first chart is the trend chart of the Nasdaq, which shows that the biggest "turning point" for the US stock market, especially technology stocks, so far this year was the sharp drop after the peak on July 11th.
The second chart shows the trend of the US dollar against the Japanese yen. It can be seen that the current surge in the yen, or the source of the global arbitrage trading storm, actually occurred on July 11th.
As for what day July 11th is, I believe readers who have been following our articles regularly will not be unfamiliar with it: the previous US CPI release day.
What happened on that day? And why it triggered a series of cross asset price linkage reactions from the stock market to the foreign exchange market, which we have repeatedly introduced in previous reports, we will not elaborate on here. And tonight's market highlight is actually only one: after the last CPI release day triggered a major turning point in the market, will the big market trend still occur this time? What preparations do investors need to make?
Without much nonsense, we will tell you again through a graphic essence version of the US CPI data forecast:
What is the market expectation for tonight's CPI data?
Let's first take a look at Wall Street's expectations for tonight's CPI data:
After an unexpected decline in CPI in June, institutional economists surveyed by the media currently predict that the overall CPI in July is expected to rise by 0.2% month on month (higher than the previous month's -0.1% decline) and by 3.0% year-on-year (the same as June's 3.0%).
Excluding volatile energy and food prices, the core CPI for July is expected to increase by 0.2% month on month (0.1% higher than the previous value) and 3.2% year-on-year (3.3% lower than the previous value).
In terms of the core CPI month on month aspect, which is relatively the most concerned among the four sets of data, the current distribution of institutional surveys is as follows:
Among the 66 analysts interviewed by the media, only 3 analysts expect the month on month increase in core CPI in July to reach 0.3%, 7 analysts expect a month on month increase of 0.1%, and the rest of the analysts expect a month on month increase of 0.2%.
It is worth noting that prior to tonight, the month on month data of core CPI in the United States had been lower than the market estimate for three consecutive times - the longest such experience since the COVID-19 crisis. Whether this scene will continue tonight is worth noting.
In addition, another highlight of tonight's data is whether the overall year-on-year increase in CPI in July can be slightly lower than expected, thus entering the "era 2" again after more than three years (2.9%). If this scene really occurs, it may become a "hype point" in the market.
In Nick Timiraos' investment banking forecast summary from the New Federal Reserve News Agency, major Wall Street institutions have either predicted a year-on-year CPI of 3.0% or 2.9%, so the probability of the data ultimately falling to 2.9% is still not small.
However, as another reference, the Cleveland Fed's inflation forecast model shows that the overall inflation rate in July may rise by 0.24% month on month and 3.01% year-on-year; The core CPI increased by 0.27% month on month and 3.33% year-on-year. This indicates that the Cleveland Fed's model suggests that there may be an upward risk in tonight's data compared to market expectations.
How can investment banks break down tonight's data specifically?
Let's take a quick look at the specific breakdown of tonight's data by major investment banks.
Firstly, Bank of America believes that due to core service inflation and the rebound in energy prices, the overall CPI in July is expected to increase by 0.25% month on month (not rounded), and is expected to remain unchanged at 3.0% year-on-year; The bank also expects the core CPI to rise by 0.22% month on month (not rounded). The bank believes that although this inflation data is not as low as the June report, it is generally consistent with the previous downward trend of inflation and should meet the criteria for triggering the Federal Reserve to start cutting interest rates in September.
In terms of core service inflation, Bank of America pointed out that due to the decrease in airfare prices, the core service inflation excluding rent and owner's equivalent rent (OER) has fallen in June, but it is expected that the decrease in airfare prices in July will decrease. In addition, housing prices are expected to rebound, but it is anticipated that the slowdown in rent and homeowner equivalent rent (OER) will remain unchanged.
Goldman Sachs' view is more dovish, predicting that the core CPI will rise by 0.16% month on month and 3.20% year-on-year. The bank also expects the overall CPI to rise by 0.17% month on month and 2.93% year-on-year in July. The bank emphasized the trends of four key components that it expects to appear in this month's report:
Firstly, the bank expects that the prices of used cars (-1.5%) and new cars (-0.1%) will further decrease in July. At present, the auction price of second-hand cars has dropped by 26% from its peak, while the second-hand car prices in the CPI composition have only decreased by 18%, indicating that there is still room for further decline in the classification indicators in the CPI report.
Secondly, the bank expects a 2.5% decrease in airfare prices in July, which is another significant drop after the decline in June and reflects the continued adverse factors caused by seasonal distortions.
Thirdly, Goldman Sachs expects a moderate increase in homeowner equivalent rent OER (+0.29%), with a slight rebound in primary rent (+0.33%), reflecting the lagged (6-month) impact of the January OER surge and rental decline. However, looking ahead, Goldman Sachs believes that the strong growth in single family housing rents is likely to lead to OER increases exceeding rent.
Fourthly, the bank expects car insurance prices to rise, but the increase will not be as fast as at the beginning of the year: the expected increase in the car insurance portion is 0.7%, while the average increase so far in 2024 is 1.2%. The rise in car prices, maintenance costs, medical and litigation costs have all brought upward pressure to insurance companies, but there is a long delay in transferring premiums to consumers, partly because insurance companies must negotiate price increases with state regulatory agencies.
How will tonight's data affect the financial market?
According to the Chicago Mercantile Exchange's Federal Reserve Watch tool, interest rate futures market traders currently expect a probability of a 50 basis point rate cut by the Federal Reserve in September to be about 52%, and a probability of a 25 basis point rate cut to be 48%.
Considering whether to cut interest rates by 25 basis points or 50 basis points in September, the market's forecast is almost 50-50, and the quality of tonight's CPI data will obviously affect the changes in this "balance".
As far as the foreign exchange market, bond market, and precious metal market are concerned, the impact of tonight's CPI data on the market is undoubtedly relatively easy to judge. If the data is higher than expected, it will obviously be positive for the US dollar, push up US bond yields, and negative for gold. On the contrary, if the data is lower than expected, it may be negative for the US dollar, push down US bond yields, and then be positive for gold.
What is relatively difficult to judge is actually the trend of the US stock market. The last CPI data was lower than expected, which should have benefited the US stock market. However, after a brief surge on the same day, the US stock market sparked a wave of rotation, and the tech giants with the highest market capitalization actually suffered a sharp decline, thus dragging down the performance of the stock index.
And tonight, whether similar wheel movements will occur again is actually a question mark. This is because the recent increase in the risk of economic recession in the United States has actually shaken the foundation of the rotation to a large extent. People originally expected that a rate cut in the context of a stable economy would benefit a series of small cap and value stocks that benefited from the economic growth cycle more. However, if the rate cut is due to a sharp decline in the economic outlook, then this underlying logic cannot be established.
From the current judgment of investment banks, tonight may still be based more on the traditional logic of "lower than expected inflation data will benefit the US stock market". The following chart shows Goldman Sachs' expected potential rise or fall of the S&P 500 index under different core CPI month on month performances tonight:
(Left: Tonight's core CPI month on month performance; Right: Tonight's S&P 500 index up and down)
Morgan Stanley, which used to predict the impact of CPI on the market almost every time it didn't fall, has creatively combined tonight's CPI data with Thursday's retail sales data for analysis. The following figure shows all the scenarios predicted by the bank:
CPI year-on-year>; 3.4%, Retail MoM> 0.5%: This is the most unstable situation, as bond yields will respond to stronger consumers and higher inflation rates. We will see the bond market quickly reprice, returning to betting on a 25 basis point rate cut in September and waiting for the Jackson Hole Global Central Bank Annual Meeting to reassess the Fed's actions. In this scenario, the S&P 500 index is expected to decline, with NDX>RTY (NASDAQ 100 outperforms Russell 2000);
CPI year-on-year>; 3.4%, retail sales fell at 0.1% -0.5% month on month: Due to the non farm employment data at the beginning of this month, the market turned to concerns about economic recession, and the hot CPI data may bring stagflation risks. In this scenario, the S&P 500 index will decline, with NDX>RTY;
CPI year-on-year>; 3.4%, retail month on month<; 0.1%: This is the most "stagflation" situation, and there is no consensus in the market on this. If this scene occurs, all risky assets will be sold off. In this scenario, the S&P 500 index will decline, with NDX=RTY (both performing equally well);
CPI fell between 3.0% and 3.4% year-on-year, while retail sales were higher than or equal to the previous period; 0.5%: This will provide support for the stock market as we can see a downward trend in core CPI compared to the previous period, consumer confidence recovering, and expectations of economic growth that is no longer accompanied by high inflation. In this scenario, the S&P 500 index will rise, NDX
The year-on-year CPI fell between 3.0% and 3.4%, and the month on month retail fell between 0.1% and 0.5%: this is a positive result, as we will see the economy cool down but still have resilience, and there will be no inflationary impulses again. In this scenario, the S&P 500 index will rise, with NDX=RTY;
CPI fell between 3.0% and 3.4% year-on-year, while retail sales were less than or equal to month on month; 0.1%: The stock price trend will depend on the degree of unexpected decline in retail sales. A flat or negative growth in retail sales will be particularly detrimental to the stock market. In this scenario, the S&P 500 index will decline, with NDX>RTY;
CPI year-on-year<; 3.0%, Retail MoM&gt; 0.5%: This will be the most bullish scenario for the stock market, as it will recreate the story of the blonde girl. The market growth is expected to expand. In this scenario, the S&P 500 index will rise, NDX
CPI year-on-year<; 3.0%, with retail falling between 0.1% and 0.5% month on month: This is another positive result as consumer spending remains flexible and there is no inflationary impulse. In this scenario, the S&P 500 index will rise, NDX
CPI year-on-year<; 3.0%, retail month on month<; 0.1%: Although the initial decline in CPI may alleviate some concerns about stagflation risks, this combination will bring new recession concerns to the market. We may see the bond market react quickly to this data, betting on a 50 basis point or more rate cut in September. In this scenario, the S&P 500 index will decline, NDX