CICC: There is a high probability that the Fed will skip interest rate cuts in January, but there is still a possibility of rate cuts in March.

date
16/01/2025
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GMT Eight
CICC released a research report stating that the core CPI in the United States increased by 0.2% month-on-month in December, down from 0.3% the previous month, and decreased to 3.2% year-on-year from 3.3%, both below market expectations. The most concerning supercore inflation for the Federal Reserve fell, while core goods and rent inflation remained moderate, with no signs of re-acceleration. Despite strong non-farm payroll numbers last Friday, inflation continues to slow, indicating no signs of overheating in the economy. This is good news. US bond yields fell, and US stocks rebounded. The previous judgment remains that the US is likely to achieve a "Goldilocks" economy, and the market may have overestimated the upward risk of US inflation. The probability of the Fed skipping a rate cut in January is high, with the possibility of a rate cut in March still there. The view that there may still be two rate cuts in the first half of the year remains unchanged. Key points from CICC: The backdrop of this inflation data release is the stagnation of the slowdown in core inflation since the fourth quarter. The market was worried that strong non-farm payrolls and service sector vitality last week could bring potential risks of inflation. However, the data shows that inflation in December was moderate, with core CPI at 3.2% year-on-year, below market expectations of 3.3%. Overall CPI was at 2.9% year-on-year, in line with market expectations. Core CPI seasonally adjusted quarter-on-quarter slowed from 0.3% the previous month to 0.2%. The three-month annualized growth rate fell from 3.7% to 3.3%. These data help alleviate concerns in the market that the Fed may not cut rates this year or cut rates later. After the data was released, market sentiment improved, US bond yields fell across the board, and the three major US stock indexes rebounded strongly. In terms of sub-items, the price increase of core services (supercore) excluding rent, which the Federal Reserve is most concerned about, broke the previous trend of no less than 0.3% for the past four months and fell to 0.2%. Looking at the annualized rate for the past three months, non-rent core service inflation was at 3.5%, down from 4.3% in the previous two months. Despite the influence of rising energy prices, the increase in ticket prices (3.9%) remains high, but prices for healthcare (0.2%) and education services (0.2%), which are more related to strong non-farm payroll growth, are relatively moderate. Combining the slowing growth in hourly wages from the non-farm report last week, the current labor market does not contribute to inflation rebound. The price increase of core goods fell from 0.3% the previous month to 0.1%, showing no signs of re-acceleration. The monthly growth rates for new cars (0.5%) and used cars (1.2%) fell from the previous month but still remained in a rapid growth range, possibly continuing to be influenced by the replacement of damaged vehicles after Hurricane Milton in October. The Los Angeles wildfires in January may provide some support for the replacement demand for damaged vehicles in the future, thereby increasing price stickiness. Despite this, inflation for other core goods continues to trend downward, with prices for TVs (-0.5%), audio equipment (-3.8%), sporting goods (-0.4%), toys (-1.0%), computers (-0.9%), and smartphones (-1.7%) falling for several months, and furniture and household appliance prices falling from a growth of 0.7% the previous month to a decrease of 0.2%. There is still no clear evidence of early price hikes due to concerns about potential tariff increases by the Trump administration. Rent for housing increased by 0.3%, remaining moderate, while hotel prices fell slightly. The month-on-month increase in rent for main residences and equivalent rent by owners rose from 0.2% the previous month to 0.3%, but overall rent inflation has cooled down since the fourth quarter compared to the high growth of 0.4% in the previous period. Hotel prices in December fell after rising 3.7% month-on-month in November, with a decrease of 1.2%. The data above indicates that strong employment and moderate inflation can coexist, and the market may have overestimated the upward risk of US inflation. In the annual report, it is believed that with gradual improvement in supply, the US is likely to achieve a "Goldilocks" economy, with no excessive inflation or significant unemployment, moving towards a balanced state. The inflation data for December support this view. Looking ahead, with the housing and labor markets moving towards equilibrium, abundant global capacity, limited commodity inflation pressures, the likelihood of high inflation as seen in 2022 is low. The market may have overestimated the upward risk of US inflation and underestimated the challenges facing the global economic recovery in a high-interest rate, strong dollar, and potential tariff uncertainty environment. Moderate inflation leaves room for the Fed to cut rates, with the possibility of two rate cuts in the first half of the year still there. Due to the strong non-farm payroll data last Friday, showing a stable labor market, the Fed does not need to cut rates again in the short term. Considering that Fed Chair Powell indicated a slowing pace of rate cuts at the December FOMC meeting, the Fed is likely to skip a rate cut in January. However, if inflation slows further, the Fed may resume rate cuts in March and cut rates again in the second quarter. The forecast in the annual report remains unchanged, with the federal funds rate expected to be lowered to a neutral level of 3.75% to 4% by the end of the second quarter.

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