The market that takes the lead and the calm CPI

Before everything begins, the wind is already stirring.

It's like a showdown in a martial arts novel, where the masters have yet to appear, but the mountains are already echoing and the dust is flying.

The market before the release of the US CPI data was shrouded in such a desolate atmosphere.

The market, like spectators in this "showdown," had already placed their bets on the outcome of the data.

Non-US currencies such as the Euro surged significantly before the data release, with the Euro rising from around 1.0980 to 1.1030; offshore Renminbi started to rise slightly later than the Euro, already up more than 100 points before the data release.

CPI Data Basically in Line with Expectations

The overall CPI in the US for July basically met expectations, with the unadjusted CPI for July at 2.9% year-on-year, falling for the fourth consecutive month, returning to the "2% range" for the first time since March 2021, but both core and month-on-month data met expectations.

Inflation did not show a significant decline as the market had expected, leaving the market slightly disappointed.

Overall Situation:

US unadjusted CPI for July at 2.9% year-on-year, expected 3.00%, previous value 3.00%.

US unadjusted core CPI for July at 3.2% year-on-year, expected 3.20%, previous value 3.30%.

US seasonally adjusted CPI for July at 0.2% month-on-month, expected 0.20%, previous value -0.10%.

US seasonally adjusted core CPI for July at 0.2% month-on-month, expected 0.20%, previous value 0.10%.

Breakdown:

Looking at the breakdown, the decline in used car prices was the biggest contributor to the decline in core inflation, with medical, entertainment goods, new car, and clothing prices all showing significant declines; housing, transportation, and entertainment services continue to be the main contributors to inflation growth, with rent and owners' equivalent rent showing strong stickiness, housing inflation slightly rising again, making it difficult for month-on-month declines to be significant.

Super core service inflation rose by 0.21% this month, relatively moderate, but significantly higher than the slight declines seen in May and June, which was also a key reason for the market's disappointment.

Market Reaction:

After the weakness in PPI the night before, the market had very low expectations for this CPI release. Following the release of data that basically met expectations, the market showed a "buy the rumor, sell the fact" trend: the US dollar index rose and then fell, recovering its losses in the latter part of the night; short-term US bond yields rose, the probability of a 50bp rate cut by the Fed in September decreased from 60% to 40%, and the expected rate cut for the year decreased from 108bp before the data release to 103bp.

Who Decides the Rate Cut Magnitude

In the world of trading, things that are already expected may no longer be the key.

The author believes that as inflation steadily enters a downward channel, the market's focus may gradually shift to determining the basis for the Federal Reserve's assessment of the economic situation.

1. Inflation: Currently, the overall situation of inflation in the United States is indeed cooling down, but the sticky housing inflation in this CPI does not support a 50bp rate cut by the Federal Reserve:

2. Economy: The recent characteristics of the U.S. economy are:

• The service sector has been performing well and showing a steady upward trend.

• The manufacturing sector is performing poorly and trending downwards.

• Retail data has been quite volatile overall, but recently it has been notably weak, with nearly zero growth for three consecutive months.

Last night, Chicago Fed President Goolsbee stated that recent price pressures have made progress while employment data has been disappointing, making him increasingly concerned about the labor market rather than inflation. Therefore, tonight's retail sales and weekly jobless claims data are very important. The current market expectation is for a 0.3% month-on-month growth in retail sales.

If retail sales data weakens, the market is likely to continue trading in the direction of a 125bp rate cut within the year; if retail sales data exceeds expectations, the current downward trend of the U.S. dollar may temporarily come to an end.

We wait and see.

Author: Chen Min, Source: Morning Market, Original Title: "Market on the Run and Calm CPI"