Zhongjin: Overall increase in US CPI in February, but core CPI fell. Impact of Iran situation has not yet manifested.

China International Capital Corporation (CICC) released a research report stating that the just released US CPI for February met expectations, with an overall increase but a decrease in core inflation. However, the focus of the market is clearly not on the data up to the end of February. The sudden escalation of tensions in Iran at the end of February leading to a surge in oil prices has not yet been reflected in this data, and is likely to gradually manifest in the coming month. In addition, core service prices such as hospital services, clothing, and hotels showed significant increases in this data. Therefore, although this data met expectations, the US dollar and US bond rates saw a slight increase after the data was released, indicating market concerns about the future. Apart from the difficult-to-predict situation itself, it is recommended to closely monitor the trend of the US dollar as an indicator of monitoring liquidity pressure, and to formulate corresponding response strategies based on the different paths of oil prices. CICC's main points are as follows: The just released US CPI for February met expectations, with an overall increase but a decrease in core inflation, almost exactly in line with the bank's previous forecasts. Specifically, 1) the month-on-month contraction in used car prices narrowed to -0.38%, consistent with the strengthening trend of the Manheim Used Car Index. 2) Clothing prices increased by 1.28% month-on-month, possibly due to retailers passing on tariff pressures through repricing at the beginning of the year. 3) Airfare decreased by 1.36% as expected, returning to normal from extreme values. 4) Significant decline in major rental prices by 0.13% month-on-month, possibly related to the noticeable high level of the previous value of 0.29% (rental samples rotate every 6 months, so the previous value in this sample was August last year), and may also be related to the fundamental weakness reflected in the February non-farm employment data. 5) Retail gasoline prices drove energy commodities up by 1.10% month-on-month. However, the market focus is clearly not on the data up to the end of February. The increase in oil prices caused by the sudden escalation of tensions in Iran at the end of February has not yet been reflected in this data, and is likely to gradually manifest in the coming month. In addition, core service prices such as hospital services, clothing, and hotels showed significant increases in this data. Therefore, although this data met expectations, the US dollar and US bond rates saw a slight increase after the data was released, indicating market concerns about the future. The impact of recent events in Iran is expected to gradually materialize next month. The bank's calculations show that a 10% increase in oil prices will raise the overall US CPI by 0.2-0.3 percentage points. Prior to the tension in Iran, the bank expected the US CPI to peak at 2.8% in the second quarter. Therefore: 1) If oil prices stabilize at $80, the CPI may reach a peak of 3.1-3.2% year-on-year; 2) If oil prices reach $100, the CPI may reach a peak of 3.5%, aligning with the Fed's benchmark interest rate, making it difficult for the Fed to cut rates. In other words, as long as oil prices do not exceed the $100 watershed, cutting rates becomes more a matter of delay rather than reversal (current CME rate futures estimate a delay in rate cuts until September). Looking ahead, the key factors are where oil prices stabilize and how long they stay at that level. At the beginning of the week, Brent oil prices reached nearly $120, but later fell to around $90 following hints by Trump that the conflict would end soon and the IEA's plan to start a large-scale release of crude oil inventories. CICC's commodity team predicts that if the Strait of Hormuz is quickly reopened, oil prices may stabilize around $80-90 in the second quarter, gradually falling to around $70 in the third and fourth quarters. Based on the above calculations: 1) If oil prices remain volatile at this level, the Fed can still look through short-term disruptions and focus on long-term growth pressures, so rate cuts will be delayed rather than reversed. Rate cut expectations may still return, and cyclical sectors sensitive to interest rates can still recover, just later than expected. 2) If oil prices surge and then fall rapidly again, the substantial disturbance to monetary policy would be minimal, but it could bring about momentary shocks to financial assets and even trigger a liquidity crisis. At this time, the US dollar would strengthen, and all assets including safe-haven asset gold would come under pressure, similar to how tensions in Iran affected the markets in the US and China last week and this week. Therefore, in addition to the difficult-to-predict situation itself, it is recommended to closely monitor the trend of the US dollar as an indicator of monitoring liquidity pressure and formulate corresponding response strategies based on the different paths of oil prices.