Minsheng Securities: Core inflation in the United States is expected to face an upward turning point in the year-on-year comparison in the fourth quarter.

Minsheng Securities released a research report stating that September inflation is just the beginning of a series of "data shocks." The acceleration of inflation in the fourth quarter and the possibility of better than expected employment data may make the Federal Reserve's easing path more cautious. This means that the market's previous "blind euphoria" is entering a cooling-off period, and in the short term, fluctuations and adjustments in precious metals and risk assets may continue. Minsheng Securities believes that the year-on-year core inflation in the fourth quarter will face an upward turning point. With the release of a new round of restocking demand in the US, alongside the departure of inventories from bonded zones after tariffs are implemented, combined with the dilution of corporate profit margins, the month-on-month growth rate may accelerate further. This means that inflation pressures in the fourth quarter will further intensify. In the context of accelerating inflation, the final interest rate path may be less optimistic than market expectations (the current market pricing suggests three rate cuts by January next year). There may be an anticipated reverse correction in the fourth quarter: alongside the gradual recovery of the job market post rate cuts, an acceleration in inflation may lead to the Federal Reserve delaying rate cuts in December or January next year. Minsheng Securities' main points are as follows: Since October, the lack of data caused by the government shutdown has led macro traders to drive blindly into the "fog." Market participants who rely on macro indicators for investment research, after losing their sense of direction, can only tightly hold the steering wheel and accelerate forward. Therefore, we see that precious metals and risky assets with the strongest momentum are accelerating their upward trend. But with the upcoming data validation, the market begins to feel hesitant if it has ventured too far in the wrong direction (as reflected in profit-taking on the market). As the first official inflation data released since the US government shutdown, the appearance of September CPI is self-evident in its impact on the market. We expect that under the differentiation of "hot and cold" sectors in services and goods, core CPI in September is expected to maintain a moderate growth rate, and recent remarks by Powell indicate that the urgency of the job market currently outweighs concerns about inflation. Therefore, this data may disrupt the rate cut expectations priced in for October, but is unlikely to have a disruptive impact. We believe that September inflation is just the beginning of a series of "data shocks", and the possibility of accelerating inflation and better than expected employment data in the fourth quarter will make the Federal Reserve's easing path more cautious. This means that the market's previous "blind euphoria" is entering a cooling-off period, and in the short term, fluctuations and adjustments in precious metals and risk assets may continue. Specifically, what will the picture of September inflation look like? We expect that driven by energy and food inflation, September CPI will further rise to above 3%, which is in line with high-frequency data. Core CPI growth is expected to remain steady, maintaining around 3.1% - although under the impact of tariffs, leading to continuous price increases of goods, the downward inflation in services like housing provides some cushion, leading to an overall slower increase in core CPI rate. The rise in commodity prices is driven mainly by two factors: On one hand, new car models stimulate car purchasing demand, coupled with the "consumption rush" effect brought by tax incentives before the end of September, cars remain an important force behind the rise in core commodities. On the other hand, the impact of tariffs on price increases has become more apparent. According to a study by Harvard University on prices of products from large retailers in the US, retail prices of imported goods have risen again in September, and the range and intensity of tariff impacts has expanded. It is expected that imported goods such as furniture, clothing, and leisure products will see a moderate growth month-on-month. However, the slowdown in service inflation may offset the upward pressure on goods inflation to a certain extent. Particularly in a high-interest rate environment, housing inflation continues to weaken, based on high-frequency leading indicators like the Zillow housing price index, there is still significant downward pressure on housing CPI. Additionally, with the end of the summer season, prices of services like transportation and leisure driven by travel and tourism show a downward trend (such as airline ticket prices), partially mitigating the price increase momentum brought by tariffs. In conclusion, we expect core inflation in September to continue its moderate upward trend, which also means that the market's pricing for a rate cut in October is unlikely to be reversed. In the short term, the Federal Reserves weighing of risks in the job market outweighs inflation concerns, with Powell emphasizing multiple times recently that signs of softening are increasingly appearing in the labor market. At least at this point, moderate inflation leaves room for the Federal Reserve to proceed with a rate cut in October and may prioritize addressing employment issues. So, how to assess the pace of future inflation and rate cuts? We believe that the year-on-year core inflation in the fourth quarter will face an upward turning point. Even assuming a continuation of the current 0.3% moderate growth rate in core CPI, its year-on-year growth rate will enter an upward channel in October, breaking free from the stable state of about 3.1% for three consecutive months. Core CPI is expected to rise to 3.2%, 3.4%, and 3.7% year-on-year in October, November, and December respectively. Furthermore, as mentioned in our previous reports, excessive stocking due to previous "import hoarding" and corporate tax avoidance strategies has slowed down the transfer of tariffs to the cost side. According to the latest research by the St. Louis Fed, the current tariff-to-price transmission is only about 35%, with factors such as price adjustment delays and price pressure in a competitive environment making the transfer to the consumer side less apparent. With the release of a new round of restocking demand in the US and the departure of inventories from bonded zones after tariffs are implemented, plus the dilution of corporate profit margins, the month-on-month growth rate may further accelerate, meaning that inflation pressures in the fourth quarter will further intensify. Therefore, even if a 25 basis point rate cut is implemented in October as expected, the Federal Reserve's future path of easing may be more constrained. In the context of accelerating inflation, the ultimate interest rate path may not be as optimistic as market expectations (current market pricing suggests three more rate cuts by January next year). There may be an anticipated reverse correction in the fourth quarter: alongside the gradual recovery of the job market post rate cuts and the acceleration of inflation, this may lead to the Federal Reserve delaying rate cuts in December or January next year. Of course, another important potential disturbance for fourth-quarter inflation is the Trump tariff ruling, which may provide the Federal Reserve with a more lenient decision-making window. The Supreme Court is expected to start oral arguments in early November, followed by a ruling. If deemed illegal, Trump's efforts to push for equivalent tariffs will be in vain; although Trump has recently accelerated the introduction of 232 tariffs as an alternative and contingency plan, compared to comprehensive equivalent tariffs, industry-specific tariffs will have a weaker impact on inflation, which may actually support the Federal Reserve's rate cut decision more. And the more crucial trump card - employment data, could be disturbed by temporary "government department unemployment" caused by the short-term shutdown, with uncertainty remaining high on when the data will be released.