SignalPlus Macro Research Report (20231013): CPI is higher than expected, market risk aversion spreads
After a full week of dovish comments from the Fed and a rebound in risk sentiment,The market entered the CPI data release with dovish expectations. The inflation market priced the CPI at 307.34 (meaning that the CPI increased by 0.18% month-on-month), while the market consensus shown by Bloomberg was 0.3%., as a result, the actual released CPI increased by 0.4% month-on-month, and the core CPI increased by 0.3% month-on-month. The former was higher than market expectations, although most component items were in line with expectations (energy +1.5%, gasoline +2.1%, services +0.6%, Air tickets +0.3%, food +0.3%, clothing -0.8%, used car prices -2.5%),However, housing prices, which are highly weighted in the CPI, have accelerated their growth again (+0.6% vs +0.3%), which still drives the overall CPI to rise. Among them, owner equivalent rent (OER) has experienced the strongest monthly increase since February., contrary to the Fed’s expectations for its continued slowdown.
Outside of housing,The rapid rise in super core CPI (i.e., non-housing services, up 0.51% month-on-month) is also consistent with headline inflation hovering near 4% (above the Feds 2% target), breaking the market’s expectations that the Federal Reserve can start to significantly cut interest rates in the short term.
While the magnitude of the CPI surprise wasnt particularly shocking, this weeks fixed income and short squeeze frenzy had left market positioning relatively unbalanced ahead of the data release, with stocks remaining strong for much of the morning, but U.S. Bonds were clearly at a disadvantage throughout the trading day.
After the CPI data was released, the bond market had fallen sharply by 13 basis points before entering the 1 pm auction, and the poor auction results shattered the remaining buying momentum of the day.30-year bond tail +3.7 basis points, highest in two years, the bid multiple was only 2.35 times (the weakest since March), and terminal demand fell to only 81.8%, the worst since December 2021.The decline in bonds continued until the close, with the yield curve overall rising by 9-16 basis points in a bearish trend, and risk aversion also spread to the foreign exchange market (DXY +0.7%) and the stock market (SPX -1%).
In the absence of important economic data releases next week, the impact of macro events will be suspended. The market must wait until Chairman Powells speech on Thursday to further confirm the dovish policy shift hinted by other FOMC members. However, the market will also pay attention to the upcoming earnings reports. quarter, the EPS threshold for this quarter will be much higher than the previous two quarters. On the interest rate front, given the risk of a renewed rise in inflation, bond investors are likely to turn their attention to ongoing quantitative tightening and supply estimates, which are expected to be larger in the November refinancing announcement Growth, therefore, even if the market does not like it, but with financing costs remaining high, the term premium is likely to continue to rise and the yield curve may continue to steepen.
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