Guotai Haitong: Energy Cools, US Core Inflation Pressures Spread

Guotai Haitong released a research report stating that US CPI rose 0.4% MoM in October, while core CPI posted 0.3% MoM for the third consecutive month, both above market expectations. By component, energy, used cars, and housing cooled simultaneously, but tariff-related goods and cost-sensitive services such as transportation heated up notably. Core inflation excluding used cars and housing rose to 0.4% MoM, indicating a broadening of price increases. The firm believes this may signal that the second-round pass-through of oil prices is unfolding; combined with October nonfarm payrolls beating expectations, a December rate hike is essentially certain, with the magnitude becoming the focus. Guotai Haitong's main views are as follows: Both CPI and core CPI MoM exceeded expectations. October US CPI fell from 0.6% to 0.4% MoM, above the market expectation of 0.3%; core CPI held at 0.3% MoM, above the market expectation of 0.2%, with the seasonally adjusted annualized core CPI rate edging down from 4.1% to 3.6%. Energy fell from 5.2% to 0.7% MoM, with gasoline dropping from 9.1% to 1.0%; oil prices have fallen further since November, and the November energy component may turn negative MoM. Core services contributed about 0.2 percentage points to CPI MoM, becoming the main driver. Used cars and rents cooled, while core pressures spread to broader components. On core goods, used cars swung from 0.7% to -1.2% MoM, dragging down core goods, but the Manheim index already rebounded in October, and downward pressure on used car prices is expected to ease from December; tariff-related goods such as furniture, home appliances, and toys saw notably faster price increases, while computers and peripheral equipment continued to see narrowing gains. On core services, owners' equivalent rent and primary residence rent fell to 0.32% and 0.20% MoM respectively, but the housing rent index continued to rebound, suggesting the rent decline may not be sustained; within core services excluding housing, cost-sensitive components such as motor vehicle insurance, maintenance and repair, and public transportation heated up notably. Core inflation excluding used cars and housing rose from 0.3% to 0.4% MoM. The firm believes this may signal that the second-round pass-through of oil prices is unfolding; the ISM services price index remains elevated, corporate costs have not been fully passed through, and core services may face further upward pressure ahead. A December rate hike is essentially certain, with the magnitude becoming the focus. After the CPI release, CME FedWatch showed the market-implied probability of a December rate hike rising from 84% to 100%, with the probability of a 50bp hike rising to about 9%; 2-year Treasury yields rose by as much as about 15bp, the 10-year briefly broke through 5%, the dollar strengthened, and gold and US equity futures fell. Governor Waller said that if October core CPI MoM is around 0.3%, a 50bp hike should be considered in December. The firm believes a 25bp hike in December remains the base case, with the possibility of a 50bp hike rising; October PCE and November nonfarm payrolls released before the meeting will be key. Risk warnings: The standoff in Iran keeps oil prices poised for a second rebound; the Fed's hawkish tilt exceeds expectations.