Translation in English: 25 basis points locked in? US August CPI hits a new low
As the last key piece of data ahead of next week's Federal Reserve decision, the U.S. Consumer Price Index (CPI) for August largely met expectations, dampening hopes for large-scale easing, and the market's pricing for the first interest rate cut has refocused on 25 basis points. However, interest rate futures pricing indicates that investors still anticipate significant rate cuts before the end of the year, suggesting that concerns about an economic recession cannot be ignored.
Rental Rebound Disrupts Core Inflation
Data released by the U.S. Department of Labor on Wednesday showed that the overall U.S. CPI increased by 2.5% in August, influenced by a decline in energy prices. This is the smallest year-over-year increase since February 2021.
Excluding the more volatile food and energy components, core CPI grew by 3.2% year-over-year, unchanged from the previous month, with a monthly increase of 0.3%, accelerating by 0.1 percentage point. The pace of the Owners' Equivalent Rent (OER), which had slowed down last month, picked up to 0.5%, with rising housing costs offsetting contributions from sectors such as used cars, healthcare, communication, and entertainment.
Advertisement
As a result, medium to long-term U.S. Treasury yields rebounded from their yearly lows. The 2-year U.S. Treasury note, closely linked to interest rate expectations, rose by more than 5 basis points to 3.66%, and the benchmark 10-year U.S. Treasury note increased by 3.5 basis points to 3.68%. Federal funds rate futures indicate that the market's expectation for a 25 basis point rate cut by the Federal Reserve next week has risen sharply to over 80%. Barclays believes that the unexpected increase in core CPI makes the possibility of an unexpected 50 basis point rate cut next week even smaller.
Oxford Economics released a report stating that the unexpected rise in core inflation in August reflects pressures from housing and transportation services. The Federal Reserve is more likely to adhere to a prudent easing policy moving forward, starting with a 25 basis point rate cut next week.
David Kelly, Chief Global Market Strategist at J.P. Morgan Asset Management, stated that the July core CPI data was slightly higher than market expectations, but it is more of a "noise" and there is no longer a "significant" inflation problem. "Overall, inflation is well controlled, and we are not seeing signs of deflation," Kelly said.
Peter Cardillo, Chief Market Economist at Spartan Capital Securities, commented that the overall inflation rate is actually quite low and is moving in the right direction, approaching the Federal Reserve's 2% target. The CPI report essentially confirms that core inflation still has stickiness, and it is currently unknown whether this is a temporary phenomenon, but it remains an issue.
Can the Federal Reserve Achieve a Soft Landing for the U.S. Economy?
It is worth noting that as the market digests the 25 basis point rate cut, U.S. stocks initially plunged, with the Dow Jones Industrial Average falling by over 700 points.Starting from the second half of last year, the federal funds rate has been at a near 23-year high of 5.25%-5.5%. After fully pricing in a rate cut in September, the market continues to price in at least a 100 basis point rate cut by the Federal Reserve this year, with investors still believing that the rate cut in November or December will reach 50 basis points.
JPMorgan Chase CEO Jamie Dimon reiterated his cautious stance this week. Speaking at the Council of Institutional Investors' fall conference in New York, he said, "I would say the worst outcome is stagflation—meaning a recession and rising inflation. I don't rule out the possibility of that happening."
Yicai previously reported that the recent loosening of the job market has been a concern for the Federal Reserve and is seen by many institutions as a warning sign of a recession, leading to worries about whether the U.S. economy can achieve a soft landing. Last month, the U.S. Department of Labor revised down non-farm employment positions for the year ending March 2024 by 818,000, with the overall unemployment rate hitting a near three-year high of 4.3% in July. As the excess savings accumulated by U.S. households during the pandemic are depleted, sustained income growth is crucial to support consumer spending and economic expansion.

UBS Global Wealth Management increased the likelihood of a U.S. economic recession from 20% to 25% last month, citing weak job growth and July's unemployment data as causes for concern about a recession. Previously, JPMorgan Chase raised the possibility of an economic recession in the U.S. before the end of the year to 35%, citing the need for labor market pressures to be released.
Nomura Securities International cross-asset strategist Charlie McElligott believes that the interest rate market trend is very clear: "Voluntarily deciding to reduce rate cuts now will lead to being forced to make more rate cuts later. The consensus is simple: the Federal Reserve's 'slow easing' guidance will have consequences, with 'self-fulfilling' ultimately leading to a more severe slowdown, which will require a deeper 'Federal Reserve policy mistake' rate cut."
In contrast, Lawrence Gillum, Chief Fixed Income Strategist at broker-dealer LPL Financial, is not pessimistic about the economic outlook. "Our view is that the economy is slowing down, but we do not believe it will contract, and the interest rate market has mispriced the upcoming rate cuts. Rate cuts will eventually be priced in because we certainly will not see a recession in the next few quarters," he wrote.