Authors: Everbright Macro Zhang Wenlang, Liu Zhengning
In the United States, CPI rose 2.1% in January from a year earlier, while core CPI rose 1.8% from a year earlier, 0.3% from a month earlier, the largest month-on-month increase since January last year (figure 1-2).Despite a high base in January last year, the figures exceeded expectations, suggesting that inflation is rising moderately.
In terms of breakdown, energy prices rose 5.5% year-on-year, of which gasoline prices rose 9% and electricity prices rose 2.4%. Food prices rose 1.7% year-on-year, mainly from non-family foods. In terms of core CPI, car insurance prices rose 8.5% from a year earlier, the biggest increase since June 2003. The rent rose 3.2%, mainly due to the rent of self-owned housing. Items dragging down inflation include air tickets, new cars, used cars, and clothing prices. In addition, the month-on-month decline in drug prices is noteworthy, and after Obama's compulsory health insurance is abolished, drug prices may come under some pressure.
Although inflation exceeded expectations, it had little negative impact on the market.The market is particularly concerned about the January inflation data as higher-than-expected wage growth triggered wild swings in the stock and bond markets. But overall, the inflation data had little negative impact on the market. Us stocks rose, with the Dow, the S & P 500 and the Nasdaq up 1.03%, 1.34% and 1.86%, respectively. The yield on the US 10-year Treasury note broke through the key point of 2.9 per cent. The dollar index broke through the 1990s and fell below 89, showing a lacklustre performance.
Why did higher-than-expected inflation not trigger a fall in US stocks?First, the market has digested inflation expectations brought about by rising wage growth, and the stock and bond markets have adjusted accordingly. Second, sluggish wage growth is more like a "mystery", while the cause of low inflation is relatively more certain. In our report in June 2017, "inflation is low, why is Yellen's Eagle so popular?" It is pointed out that the low inflation is a temporary phenomenon, mainly caused by individual industry factors (such as a price war leading to a sharp drop in the price of mobile phone services), which will pick up in the future. As a result, rising inflation in 2018 is nothing new in itself.
For U. S. stocks, another factor to pay attention to is the trend of U. S. bond yields.One trigger for the correction in US stocks in early February was a sharp rise in US bond yields. After the inflation data, US 10-year Treasury yields continued to rise, breaking the key level of 2.9 per cent, within walking distance of the previous high of 3 per cent. Historically, a sharp rise in bond yields in the short term has put pressure on stocks (such as a rapid rise of 30 BP a month), but the current yield is not high enough to cause a downward trend in the stock market. In the short term, however, if u.s. bond yields break further above 3%, it could trigger renewed volatility in u.s. stocks.
Source: cultural macro