The US CPI strikes tonight, the turning point is approaching? How much longer can the Fed keep its mouth shut?

　　For the US government and the Federal Reserve, inflation remains the most important economic issue at hand.

The outside world is paying close attention to the December 2022 consumer price index CPI data to be released on Thursday. The unexpected cooling data may further heat up speculation about the early end of the interest rate hike cycle, thereby exacerbating the volatility of risky assets.

　　However, the attitude of the Federal Reserve has not changed on the surface. Many officials have repeatedly made hawkish remarks, and the game between the market and the Federal Reserve regarding the policy path is unfolding.

The CPI monthly rate may unexpectedly turn down

　　As one of the few heavyweight data before the February resolution statement, the importance of the upcoming inflation data is self-evident.

According to Wall Street's latest forecast, the year-on-year growth of the U.S. CPI in December slowed to 6.5 percent from the previous 7.1 percent, and the core CPI, excluding energy and food, rose 5.7 percent year-on-year.

It is worth noting that the month-on-month growth rate of CPI may fall below zero, which will be the first time since May 2020 if it becomes a reality.

　　The fall in energy prices is seen as the main driving force behind the cooling of prices.

According to AAA data from the American Automobile Association, the price of gasoline in the United States fell by more than 12% in December last year, and fuel prices have been an important driver of the rise in CPI in the past year.

At the same time, due to the easing of supply chain bottlenecks and the downward pressure on the global economy, the prices of raw materials such as industrial metals also showed an adjustment trend last month.

　　Changes in upstream raw material prices eased the cost pressure on enterprises.

U.S. factory activity continued to come under pressure late last year as consumer demand cooled.

The Institute for Supply Management (ISM) manufacturing activity index fell further to 48.4 in December, the lowest level since May 2020.

Among the sub-indicators, the producer price index has dropped to the lowest level since the epidemic.

　　As another major component of inflation, housing inflation pressures are also easing.

Soaring mortgage rates have weighed on sales in the real estate market, while house price gains have narrowed rapidly, affecting the rental market as well.

Federal Reserve Chairman Powell also mentioned the rent issue at the press conference after the interest rate meeting in December last year, believing that as long as the rental inflation index continues to decline, housing service inflation will start to fall at some point.

　　National rent growth has slowed for the 10th month in a row, falling to 3.4% year-over-year in November, the smallest increase in 19 months, according to Realtor.com.

A recent study by the Cleveland Fed pointed out that rent data tends to lead about a year ahead of housing indicators in the CPI.

　　Goldman Sachs chief economist Jan Hatzius said in a report this week that a weakening of the U.S. housing market due to higher mortgage rates would help keep core inflation below 3 percent this year, below the federal level. Open Market Committee FOMC forecast of 3.5%.

　　In contrast, service sector inflation remains tricky.

Service industry employees account for the majority of U.S. employment, and inflation in the service sector rose by more than 7% in October last year, the fastest pace since 1982.

Charles Schwab pointed out that the industries with the tightest labor market are basically concentrated in the service industry, which has also pushed up wage pressure and potential inflation risks.

However, the economic slowdown has begun to impact the service industry. After 30 consecutive months of expansion, the US ISM non-manufacturing index will fall below the line of growth and contraction at the end of 2022. Consumer demand has shrunk sharply under economic uncertainty, and has begun to affect industries including technology jobs in some industries.

　　Bob Schwartz, a senior economist at Oxford Economics, said in an interview with a reporter from China Business News that service prices are more resistant to economic cooling and are more closely linked to labor costs.

Although the job market has cooled down, it is still hot overall. Many companies still face challenges in recruitment and labor costs in an environment of low unemployment.

　　Combined with last year's market conditions, the latest inflation data may trigger a huge shock in the market.

JPMorgan analyst Andrew Tyler expects any signs of progress in the Fed's anti-inflation actions to stimulate U.S. stocks.

"Cooling inflation should help the bear market rebound, as existing positioning may cause the market to overreact to short covering. If the CPI falls below 6.4%, the S & P 500 index may rise by 3% to 3.5%," he wrote. .

The Fed keeps its mouth shut

　　Similar to last week, many Fed officials have continued to convey "hawkish sentiment" in their speeches this week.

San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic both signaled that rates not only need to keep rising above 5%, but could stay there for some time.

Fed Governor Bowman (Michelle Bowman) believes that interest rate hikes will continue until there are convincing signs that inflation has peaked and is in a clear downward trend before adjusting monetary policy.

　　Yet austerity policies are heating up economic uncertainty.

Given that it is still in an aggressive tightening cycle, the World Bank on Tuesday projected that U.S. economic growth will slow sharply this year, lagging behind the global expansion.

The data showed that the U.S. gross domestic product (GDP) growth rate is expected to be 0.5%, a sharp downward revision of 1.9 percentage points from the previous forecast.

　　According to the CME FedWatch tool, the current market expects that the possibility of the Federal Reserve raising interest rates by 25 basis points in February and March respectively hovers at 70%, while the terminal interest rate target range of this round of interest rate hike cycle points to 4.75% to 5%. A rate cut is expected.

Affected by this, the U.S. dollar index fluctuated and fell back. It has fallen by nearly 11% from the 20-year high set in September last year. Investors bet that inflation cooling and economic risks will make the Fed turn ahead of schedule.

　　Schwartz told CBN reporters that the Fed is still far away from considering a policy shift.

However, from the perspective of emphasizing the cumulative effect of monetary policy, it is reasonable to gradually slow down the pace of interest rate hikes in the future under economic pressure.

He predicts that there may be room for 50-75 basis points of interest rate hikes in the future, and then it will be maintained for a period of time. At present, interest rate cuts are obviously not within the scope of the Fed's internal discussions.

　　JPMorgan Chase CEO Jamie Dimon believes that raising interest rates to 5% may not be enough. The Fed may need to raise interest rates beyond current expectations, with a 50% probability of rising to 6%.

In an interview with US media, he said that although the pace of the Fed was a bit slow before, it is now catching up.

Risks remain, such as the impact of the Russia-Ukraine conflict and quantitative austerity.

He is therefore in favor of the Fed considering pausing rate hikes to understand the full impact of rate hikes.