ATFX-CICC: Asset Implications for US Inflation Rally

On September 13, the US CPI for August will be released. The CICC inflation sub-model forecasts that the nominal and core CPI growth rates will rise significantly from the previous month's values, and there is even a risk that it will be higher than market expectations.

Chart: Split and forecast of month-on-month growth in US core inflation

Source: Haver, CICC Research

Chart: Split and forecast of month-on-month growth in US nominal inflation

Source: Haver, CICC Research

The model forecasts that the core CPI will grow by 0.25% month-on-month (consensus forecast 0.2%, previous value 0.16%), and the nominal CPI will grow by 0.66% month-on-month (consensus forecast 0.6%, previous value 0.17%). The model forecasts that the core CPI will decrease slightly from 4.7% to 4.3%, but the nominal CPI will rise to 3.7% year-on-year (consensus forecast 3.6%, previous value 3.2%), which means that the year-on-year growth rate of nominal inflation will rebound sharply from the June low of 2.97% to nearly 70bp.

Chart: Year-on-year growth trend and forecast of US CPI

Source: Haver, CICC Research

The increase in inflation in August was mainly driven by three factors:

Brent crude oil rose sharply from around $75/barrel to $90/barrel, driving up energy inflation.

2) Airfare prices change more than seasonally, leading to higher inflation in transportation services.

3) The low inflation in June-July was influenced by the "residual seasonality" (Residual Seasonality), and the pressure drop caused by this statistical method may weaken or even reverse in September.

Chart: Quarterly adjustment factor adjustment may have pushed up the month-on-month growth rate of U.S. inflation in August

Source: Haver, CICC Research

If the above forecast is realized, it may amplify the market's concern about the "second peak" of inflation. Superimposed on the policy uncertainty of the Federal Reserve's interest rate meeting on September 19-20, investors may be more worried about stagflation and Fed tightening in the short term, which may lead to the shock adjustment of US bonds, gold, commodities and overseas stocks, and the US dollar will remain strong. Therefore, we suggest that we pay attention to controlling risks before the CPI data falls, and the upside opportunities of US bonds and gold will be clearer after the data falls.

The medium-term economic slowdown may open up new room for inflation improvement, and we remain optimistic about the inflation outlook

From June to July, core inflation in the United States fell sharply from around 0.4% in the first half of the year to below 0.2%The structure shows comprehensive cooling,Not only did the inflation sub-items of goods, housing, health care, and transportation services continue to improve, but inflation in other core services that the market had previously considered resilient (excluding rent, health care, and transportation from core service inflation) also cooled significantly.

Looking ahead, in the medium term (over the next 1-3 quarters), we remain optimistic that inflation abroad will continue to improve: the excess savings of US residents may have been exhausted, and the resumption of student loan interest payments in September will also accelerate the consumption of household savings.

Chart: U.S. households save up to $2 trillion...

Source: Federal Reserve, CICC Research

Chart:... but may be close to running out

Source: Federal Reserve, CICC Research

In the first and second quarters of this year, consumption was the most important contributor to US GDP, and the depletion of excess savings may lead to a decline in consumption sentiment, significantly dragging down economic growth.

Chart: Consumption contributes around 70% of U.S. GDP growth over the long term

Source: Wind, CICC Research

The excess savings consumption may push some of the labor force back into the market, helping to cool the labor market and improve inflation in core services. The initial number of new jobs in the United States in August was 187,000, only about half of the initial number of jobs in May. The actual number of jobs may be lower, considering that US employment data are often revised down after they are released this year.

Chart: Preliminary U.S. employment figures have been revised down this year

Source: Bloomberg, CICC Research

In addition, the number of temporary workers in August increased significantly, reflecting that the quality of employment is deteriorating; in addition, the growth rate of wages in the United States fell to 0.2% month-on-month in August, which exceeded expectations, and the unemployment rate rose to 3.8%. Combined with the increase in the labor participation rate, it may reflect that after the exhaustion of excess savings in the United States, some workers returned to the labor market but have not yet found jobs, so the wage growth rate also weakened while pushing up the unemployment rate. The slowdown in economic growth and wage growth may open up new space for inflation to decline.

Chart: U.S. wage growth slows to 0.2% in August

Source: Haver, CICC Research

Chart: US unemployment rate rose more than expected in August

Source: Haver, CICC Research

In addition, due to the statistical lag effect, rent inflation, which accounts for about 30% of US inflation, is likely to maintain a downward trend ("Inflation Variables and Asset Changes from a New Perspective"). Finally, the recent rebound in nominal CPI has been greatly influenced by oil prices. In the context of the current global economic slowdown, we believe that the further upward space for oil prices may be limited. Our scenario analysis shows that if oil prices remain around the current price of $90/barrel, the year-on-year growth rate of nominal CPI may soon re-enter the downward channel.

Chart: Simulation of the year-on-year path of US nominal inflation under different oil price scenarios

Source: Haver, CICC Research

After excluding short-term risks, the allocation of US Treasury gold was increased on dips, and overseas stocks and commodities remained low

After the release of CPI risk in September, we believe that the allocation value of US debt and gold may continue to increase.

Many leading economic indicators suggest that downward pressure on the US economy may increase.

Chart: The US Economic Leadership Index has turned negative year-on-year

Source: Haver, CICC Research

Chart: The U.S. Treasury interest rate curve is deeply inverted

Source: Haver, CICC Research

In our mid-year outlook for major asset classes, we suggest that the shift from strength to weakness in the economy and labor market is often reflected in a non-linear process, and linear extrapolation based on the strong economic data in the first half of the year can easily overestimate the resilience of the US economy.

Chart: The US labor market's shift from strength to weakness has non-linear characteristics

Source: Haver, CICC Research

2) The supply shock of US bonds may have been fully digested by the market. The US bond market is very sensitive to changes in bond supply and demand. The US bond interest rate often rises in the early stage of the previous net supply expansion of US bonds, and then quickly returns to fundamental pricing and turns into a downward channel.

3) Financial risks limit the degree of tightening of the Federal Reserve. In our "New Perspective on Financial Risks in Europe and the United States", we pointed out that the current US banking industry is facing a new type of liquidity shock, the fragility of the financial system has increased, and the regulatory and banking systems are not fully prepared. If financial risks ferment again in the future, the threshold for the Federal Reserve to remain hawkish is high. Even if the Federal Reserve does not cut interest rates this year, improving inflation, weaker economic data, and emerging financial risks may also give rise to market interest rate cut expectations, bringing rising opportunities for safe-haven assets such as US bonds and gold. We maintain the judgment of overweight gold and US bonds in the medium term (in the next 1-3 quarters) ("Risks and Opportunities of New High US Bond Interest Rates").

Although the decline in interest rates is good for risk assets from the denominator, the economic slowdown and financial risks may suppress stock profits and risk sentiment, which is not conducive to the performance of stocks and commodities. From the perspective of valuation, the expected return of US stocks is already lower than that of US bonds and cash, and the return of risk assets is lower than that of safe assets, which is unsustainable.

Chart: Short-end U.S. Treasury yields are higher than U.S. stocks

Source: Bloomberg, CICC Research

Due to the above reasons, we downgraded overseas stocks from overallocation to underallocation in early August ("August Report on Major Assets: Asset Enlightenment from the New Situation of Real Estate"), and the recent market performance is in line with our expectations. We maintain underallocation of overseas stocks and commodities. Inflation risks in mid-to-early September may also cause some disturbance to domestic risk sentiment and the value of the RMB. However, with the introduction of domestic growth stabilization policies, the domestic economy is expected to stabilize and improve. We believe that the medium-term opportunities of class A shares and Hong Kong stocks outweigh the risks ("September Report on Major Assets: Which Asset Forecasts the Economic Outlook More Accurately").