Six questions and six answers on US Inflation in January (Soochow Macro)
The much-anticipated US inflation data for January 2022 once again exceeded expectations, with CPI rising 7.5% yoy (7.3% expected), core CPI up 6.0% yoy (5.9% expected) and 0.6 yoy (0.4% expected).The 10-year Treasury rate jumped 7bps to 2 percent and the dollar surged 20bps after the data was released.The importance of the January inflation data lies in its impact on the manner in which the Fed starts the tightening cycle. After the strong NFP data, the market is focused on the possibility of a 50bps hike at the March rATE-setting meeting. Despite the inflation data once again exceeding expectations, we still think the probability of a 50bps hike is low.What does the inflation data mean for the Fed’s March rate hike?The consensus for January core CPI growth was 0.4 per cent month-on-month, and the CME data showed a nearly 35 per cent chance of a 50pbs hike in March, which jumped to nearly 55 per cent after the inflation data.While the actual January core CPI growth did not exceed 0.6% m/m (our January m/m estimate), at this point we do not expect the Fed to hike 50bps in March.What has changed about the structure of inflation?Month-on-month rent growth picked up to 0.5% in January, while used-car growth slowed to 1.5%.The sequential growth rate of used car prices in January was the same as that in December 2021. The chip shortage is gradually alleviating, but the impact is not significant (Figure 1).In terms of housing rents, the year-on-year growth rate has soared from less than 2% in February 2021 to 3.8% in January (Figure 2). According to our analysis of historical data, the S&P US House price Index, as a leading indicator of rents, is about 15 months ahead of rents, and the index peaked and fell in August 2021.We do not expect a slowdown in rental growth until early 2023.In addition, we note here that the actual inflation data may be stronger than the official data, as this time it is distorted by the sub-weighting.On Feb. 8, the Labor Department introduced updated seasonal factors, lowering the weight of items such as energy, food and housing rents and increasing the weight of used cars.What is the wage-inflation spiral?Nominal wage growth across industries is already above 4 per cent.From an industry-wide perspective, the US employment cost Index (ECI) has maintained a year-on-year growth rate of over 4% since September 2021.By sector, average hourly earnings have seen a surge in growth momentum since the fourth quarter of 2021, led by leisure and hospitality, which grew by an average of more than 13% year-on-year in the past two months (December 2021 and January 2022) (Figure 3- Figure 4).Real wages are not rising, there is still room for corporate wage increases, and the wage inflation spiral is likely to intensify in the future.The tightest Labour market in decades has boosted workers’ bargaining power, and American firms are raising wages to attract and retain workers (see charts 5 and 6).But nominal wage growth is still lagging inflation, leaving real wages barely rising, meaning there is still room for companies to raise wages (chart 7).What is the status of the supply bottleneck?The worst may be over.The New York Fed Global Supply Chain Stress index shows signs of peaking at the end of 2021, and us supplier delivery times also show a downward trend (Figure 8).The pressure on shipping also began to ease by the end of the third quarter of 2021, with shipping prices continuing to fall (Figure 9).In addition, the rebound of the epidemic caused by Omicron has peaked, which is good for the continuous repair of the subsequent supply chain.What are the implications of the subsequent inflation deduction for the Federal Reserve’s new interest rate hike cycle?We expect us core CPI to peak by the end of q1 2022 (slightly later than we previously expected) and to fall below 4% by year-end (Figure 10).The Fed will focus on economic data ahead of the rate-setting meeting. February CPI data will be released a week before the March rate-setting meeting.We think the first fed rate hike in March is likely to rise to 50bps only if inflation surges more than expected for two consecutive months.What about asset prices?Since the beginning of 2022, the rise in 10-year Treasury rates has been mainly driven by real yields (Figure 11).On February 4th, the 10-year US Treasury rate jumped by 10bps to break 1.9% after January non-farm data exceeded expectations.In January, inflation grew faster than expected, and the real interest rate pushed up, the US bond interest rate exceeded 2%.The 2-year US Treasury rate jumped over 10bps after the release of January inflation data. The 10Y-2Y US Treasury spread may further narrow under the expectation of accelerating interest rate hikes, and the sentiment to flatten the yield curve trade heats up.Related report: How will US inflation peak in 2022?What is the risk of a wage-inflation spiral in the US in 2022?(Tao Chuan, Duan Meng) Why do commodities not fear the Previous Fed rate hikes?(Dongwu Macro Tao Chuan, Li Siqi) American stocks fell again, the Federal Reserve’s “psychological defense line” where?This public subscription account (wechat: Chuanread Global Macro) is established by the macro team of SOOwu Securities Research Institute, and is the only subscription account for the research results of this research team.The information contained in this public account is only for professional investment institutions, only for the timely exchange of research views in the context of new media.This subscription number not soochow securities research institute, publishing platform macro team study carries the content are from Yu Dongwu securities research institute has officially published research reports or to tracking and reading has issued a report, if you need to know the detailed content of the report or research information, detail please see soochow securities research institute published a full report.The contents contained in this subscription number do not constitute judgment or investment advice on specific securities at specific price, specific time point or specific market performance, and cannot be equivalent to operational advice guiding specific investment.The contents contained in this Subscription number are for reference only and the recipient shall not rely solely on the information contained in this material in lieu of its own independent judgment and shall make investment decisions at its own risk.Soochow Securities Research Institute and the research team do not assume any liability for any loss arising from or likely to arise from the use of any content contained in this subscription number.This subscription number reserves all legal rights in the content.All contents (including words, pictures, videos, etc.) published by the subscriber to this subscription number shall not be copied or reproduced without written permission;Authorized to copy, reprint, need to indicate the source as “Dongwu Securities Research Institute”, and shall not carry out any of the content of the subscription number to quote, delete or modify the original meaning.