The impact of the recent situation in Iran is expected to gradually manifest next month.
CICC released a research report stating that the U.S. February CPI data met expectations, with an overall increase but a decline in core figures. However, the market focus is clearly not on this data as of the end of February; the sudden escalation of tensions in Iran at the end of February, which caused a spike in oil prices, has not yet been reflected in this data and is likely to gradually appear starting next month. Additionally, within the core services category, prices for hospital services, apparel, and hotels showed significant increases. Thus, although the data was in line with expectations, the U.S. dollar and U.S. Treasury yields both edged higher after its release, reflecting market concerns about the future. Apart from the unpredictable geopolitical situation itself, it is recommended to closely monitor the U.S. dollar's movement as an indicator of liquidity pressure and adopt corresponding response strategies based on different trajectories for oil prices.
The main viewpoints of CICC are as follows:
The just-announced U.S. February CPI met expectations, showing an overall increase but a decline in core figures, almost exactly matching the bank's previous forecast.
Specifically, 1) the month-over-month change in used cars narrowed to -0.38%, consistent with the strengthening trend of the Manheim Used Car Index. 2) Apparel rose month-over-month to 1.28%, possibly due to merchants passing on tariff pressures through repricing at the start of the year. 3) Airfare dropped month-over-month to 1.36% as expected, returning from an extreme value to normal levels. 4) The main rent component declined more than expected to 0.13% month-over-month, potentially related to the previous month’s figure of 0.29% being significantly above the trend level (rent samples are rotated every six months, so the current sample’s prior value dates back to August last year), or linked to the weakening fundamentals reflected in February’s non-farm payroll data. 5) Retail gasoline prices drove energy goods up month-over-month to 1.10%.
However, the market focus is clearly not on this data as of the end of February, since the oil price surge triggered by the sudden escalation of the Iran situation at the end of February has not yet been reflected in this data and is likely to gradually show up next month. Additionally, core services prices such as hospital services, apparel, and hotels increased notably. Thus, although the data met expectations, both the U.S. dollar and U.S. Treasury yields rose slightly after the announcement, also reflecting market concerns about the future.
The impact of the recent Iran situation is expected to be gradually reflected next month. The bank estimates that every 10% increase in oil prices will push up the overall U.S. CPI by 0.2 to 0.3 percentage points. Prior to the Iran situation, the bank projected that the U.S. CPI would peak at 2.8% in the second quarter. Therefore: 1) if the oil price average is at $80, the CPI year-over-year peak could rise to 3.1-3.2%; 2) if the oil price average reaches $100, the CPI year-over-year peak could rise to 3.5%, equal to the Federal Reserve’s benchmark interest rate, making it difficult for the Fed to cut rates. In other words, unless oil prices exceed the $100 threshold, the Fed’s rate cuts are more likely to be delayed rather than reversed (the current CME interest rate futures predict rate cuts will be postponed until September).
How things evolve subsequently depends critically on where the oil price average settles and for how long. At the start of the week, Brent crude prices approached $120 but retreated to around $90 following Trump’s hint of a swift resolution to the conflict and the IEA’s plan to release large-scale crude reserves. CICC’s commodities team expects that if the Strait of Hormuz is quickly reopened, the second-quarter average will likely range between $80-$90, gradually declining to near $70 in the third and fourth quarters.
Looking ahead, as calculated above: 1) If oil prices hover around this level, the Fed can still 'look through' short-term disruptions and focus on long-term growth pressures, meaning rate cuts are delayed rather than reversed. Rate cut expectations can still return, and interest-rate-sensitive cyclical sectors can still recover, albeit later than anticipated. 2) If oil prices surge again and then fall back, the real impact on monetary policy may remain limited, but it could bring instant shocks to financial assets and even trigger a liquidity crisis, during which the U.S. dollar would strengthen alone while all other assets, including the safe-haven asset gold, would face pressure—similar to how the Iran situation affected the Chinese and U.S. markets last Wednesday and this Monday.
Therefore, apart from the difficult-to-assess situation itself, it is recommended to closely monitor the U.S. dollar’s trend as an indicator of liquidity pressure and prepare corresponding response strategies for different oil price trajectories.
Editor/Doris
