The Zhitong Finance App learned that GF Securities released a research report to analyze the reasons and trends of the decline in core inflation in the US. The team believes that the overall US inflation data for April 2024 was in line with market expectations, and the year-on-year decline continued. Among them, the price growth rate of rental housing, which accounts for 35%, declined slightly; super core inflation (excluding core services other than housing) also cooled down month-on-month; core commodity prices continued to fall in April, but the pace slowed down. Furthermore, since this year, the market's expectations of the Fed's interest rate cut have been “going back and forth”. The main background is the continuous fluctuation in employment and inflation data and the back-and-forth of the Fed's statements. GF Securities believes that after the data was released, the probability that the Fed would cut interest rates in September increased, and 10-year US Treasury yields fell rapidly.

First, the overall US inflation data for April 2024 was in line with market expectations, and the year-on-year decline continued. In April, CPI increased 3.4% year on year, the same as the forecast of 3.4%, lower than the previous value of 3.5%; CPI was 0.3% month-on-month, expected 0.4%, and the previous value was 0.4%. The core CPI increased 3.6% year on year, the same as the forecast of 3.6%, lower than the previous value of 3.8%; the core CPI was 0.3% month-on-month, expected 0.3%, and the previous value was 0.4%, the lowest level since December last year. Judging from the breadth and stickiness of inflation, inflation has also declined. The Cleveland Fed's Trimmed Mean CPI in April was 3.51%, the previous value was 3.60%; in April, the Atlanta Fed's sticky CPI was 4.36% year-on-year, which was also lower than the previous value of 4.45%. Second, the rental price growth rate, which accounts for 35% of the weight, declined slightly to 0.4% month-on-month, down from 0.5% of the previous value. Among them, rents for major residences fell to 0.35% month-on-month, the lowest level since September 2021. Looking back, the downward trend in rental prices is continuing: on the one hand, the historically high number of new multi-unit rental housing owners is conducive to subsequent supply release; on the other hand, leading indicators such as new lease prices will be transmitted. The growth rate of landlord equivalent rent (OER) in April was 0.42% month-on-month, lower than the previous value of 0.44%; although the pace is still uncertain, judging from the trend, the fall in rent prices for new leases for independent and multi-unit housing is likely to drive OER slowly downward.

Third, super core inflation (excluding core services other than housing) also cooled down month-on-month. The April reading was 0.42%, lower than the previous value of 0.65%, the lowest level since this year. Among them, health insurance, air tickets, and car insurance declined a lot from month to month, with 0.3%, -0.8%, and 1.8%, respectively. The previous values were 1.2%, -0.4%, and 2.6%, respectively. BLS has updated health insurance prices in this data. The reference data is the 2023 medical insurance premium retained earnings data. Therefore, the April price more reflects the decline in 2023 earnings compared to 2022, and is expected to remain low month-on-month. The leading indicator for auto insurance prices is slowly declining, and premiums may remain resilient during the year; furthermore, insurance price adjustments need to be reviewed over a long period of time by their state regulators. Other segments of supercore inflation, such as hospital services, personal care, and dining out, have maintained strong growth, which means that wage cost stickiness is still high. Following the gradual loosening of the US job market, these segments will slowly cool down.

Fourth, core commodity prices continued to decline in April, but the pace was slowing down, -0.1% month-on-month and -0.2% compared to the previous value. Among them, the prices of clothing and healthcare products rebounded, with 1.2% and 0.4% month-on-month, respectively, and 0.7% and 0.2%, respectively. New and used car prices continued to fall: in April, new car prices fell 0.4% month-on-month, and the previous value fell 0.2%. The main background was strong car promotions. Used cars and trucks fell 1.4% month-on-month, and the previous value fell 1.1%. Looking ahead, wholesale prices in Manheim, the leading indicator for used cars, continue to fall, and superimposed car inventories continue to pick up. We expect used car prices to continue the slow downward trend in the future.

Fifth, the US core CPI gradually fluctuated from the current cycle high of 6.6% in September 2022. It fell below 4% for the first time in December last year, and fell further from 3.9% and 3.8% (February and March) to 3.6% this year. Looking ahead, three major factors may cause a decline in the center of inflation: first, the slowdown in income growth combined with the exhaustion of excess savings will guide the nominal consumption growth rate closer to the trend level, and the resulting decline in aggregate demand will guide the job market to continue to cool down and ease wage pressure; second, rent prices are still cooling down and falling; third, against the backdrop of a gradual increase in supply, an upward inventory center, and a strong dollar boosting imports, core commodity prices are likely to continue the downward trend year on year. Taken together, we expect the core CPI to slowly drop to 3.2% by the end of the year. This pivot is higher than what we understood at the end of last year, but the overall trend has not changed.

Sixth, since this year, the market's expectations for the Fed to cut interest rates have been “going back and forth”. The main background is the continuous fluctuation in employment and inflation data and the back-and-forth of the Fed's statements. Speaking at the Foreign Bankers Association on May 14, Powell said that he is less confident that inflation will fall back than before; however, he still anticipates that the monthly inflation reading may return to the end of 2023 (core CPI between 0.2-0.3%, currently 0.3%), although the Federal Reserve may have to wait longer (before turning around). Powell reiterated that interest rate hikes were not within the scope of consideration. We understand that Powell continues the “data dependency” rule, and we need to see more evidence that inflation is falling back. According to our earlier judgment on inflation, although this process is slow, the trend will gradually accumulate. Furthermore, it is worth noting that the consumption growth rate of US residents will gradually approach pre-pandemic levels, and the slowdown in aggregate demand brought about by it may further change the job market (see the report “Current Status and Next Trends of the US Job Market”). Under a neutral assumption, we maintain the judgment that the Federal Reserve cut interest rates in the third quarter and cut interest rates twice throughout the year.

Seventh, after the data was released, the probability that the Federal Reserve would cut interest rates in September increased, and 10-year US Treasury yields fell rapidly. According to Fed Watch data, the probability that the Fed will not cut interest rates and cut interest rates by 25 bps in September was 27.6% and 53.5%, respectively. The previous values were 34.9% and 50.5%, respectively. The federal funds futures market implied that the number of times the Fed cut interest rates rose to 2 times throughout the year, compared with the previous value of 1.7. In response to this, US bond yields declined, and the 10-year US Treasury yield fell 9bp to 4.34%; the US dollar index fell back to 104.34 under the spread logic; against the backdrop of rising expectations of interest rate cuts and falling risk-free interest rates, the three major US stock indexes all rose.