In April, the U.S. CPI and CPI year-over-year increases greatly exceeded market expectations, inflationary concerns have intensified, interest rate hikes are expected to heat up, the panic index has soared, and global financial market volatility has increased. In the face of the “explosive” CPI, the Fed will choose how? Where will the market go from here? How should investors respond? This article analyzes and answers these questions of investor relations.
Why did the U.S. CPI hit a new high in April year-over-year?
The U.S. CPI rose 4.2% year-over-year in April, greatly exceeding expectations of 3.6%, the largest year-over-year increase since the subprime crisis in 2008, and the core CPI rose 3% year-over-year, far exceeding expectations of 2.3%, a record high. The three major U.S. stock indexes fell by more than 1% on the news, bitcoin fell below $50,000 in a single day, and U.S. bond yields moved up rapidly. Investors showed great concern about inflation and expected an early turn in monetary policy, and the Fed may therefore exit quantitative easing, which in turn will hit asset prices hard. To this end, let’s first analyze the reasons for this U.S. inflation to exceed expectations, mainly fueled by the following two factors.
First, upstream commodities have surged, increasing downstream price pressure. commodity prices have soared since 2021: crude oil up more than 35%, copper and rebar both up nearly 30%, iron ore up nearly 18%, and power coal up as much as 26%. Under the price pressure of upstream products, the cost is gradually passed to the downstream, the price of durable goods and industrial consumer goods rose faster. Energy prices were affected by last year’s low base effect, rose 47.9% year-on-year in April, pulling the CPI rose 1.45 percentage points year-on-year, contributing to the CPI rate of increase.
Second, the Biden large-scale fiscal stimulus, supply and demand recovery is not synchronized. Biden March 1.9 trillion fiscal relief bill landed, a larger part of which is directly to the citizens of cash, resulting in rapid expansion of residential consumer demand. Coupled with the fact that U.S. domestic production has not yet recovered, the supply and demand gap continues to widen, driving up downstream commodity prices. The most typical example of this is the auto industry, where new and used car prices have strengthened sharply. April CPI used cars grew 10% YoY, a record high since 1952, and 24% YoY, while new cars grew 2% YoY and 0.5% YoY. Residents have money after getting cash, so naturally consumer demand is strong. But at the same time, car manufacturers are affected by the epidemic to reduce production and “chip shortage” and other issues, production capacity is difficult to keep up, the gap between supply and demand further opened, car inventory also hit a record low, the price is naturally higher.
When will the Fed act? How far away is the interest rate hike?
Commodities continue to revel in the March PPI upwards beyond expectations, and the first meeting of the Golden Stability Committee after the year also specifically mentioned “concern about the trend of commodity prices”, triggering market concerns about inflation heating up and policy tightening. Inflation is indeed objective, but structural.
The current round of U.S. inflation may have continued upward momentum, but this is mainly driven by a low base and some temporary factors such as the supply gap in the same period last year, as vaccine penetration increases, the U.S. domestic production operations will gradually resume, the supply and demand gap repair, inflationary pressure will ease during the year.
We can recall last September, when the Federal Reserve launched the “average inflation targeting system”, saying it would allow inflation levels to moderately exceed 2% at certain times. This move can be described as meaningful, on the one hand, shows that as early as six months ago the Fed has been expected to the upcoming inflation, on the other hand, also shows that the Fed again trying to relax the degree of tolerance of general inflation. This move is likely to be in the future “stable employment” to leave the policy operating space.
On April 9, Powell made it clear that the prerequisite for QE tapering was to “increase the number of jobs by a million for several months in a row”, and then not long after. After that, the April non-farm payrolls data was released, a big blowout, with only 266,000 new jobs, far below the expected value of 1 million. So it seems that “consecutive months” still has a long way to go, we expect at least 6 to 9 months the Fed is difficult to quickly tighten monetary policy, the probability will be at the end of 2022, the end of 2022 Fed rate hike probability has jumped from 88% to 100% after the release of inflation data.
What is the impact on global capital markets?
There is a certain export effect of this U.S. inflation, but domestic inflation is basically manageable. This global economic repair, Biden fiscal stimulus under the rapid increase in U.S. aggregate demand, but the pace of economic repair in China and the United States is not uniform. U.S. production repair is slow, but the domestic epidemic is well-controlled, production is the first to repair, exports have increased greatly, leading to a surge in upstream raw material prices.
However, the surge in raw material prices also led to a rapid rise in production costs, mid- and downstream enterprises more profit margins are seriously compressed, the level of income of residents has not significantly improved, domestic demand is not sluggish, consumption is relatively weak. Therefore, PPI to CPI conduction blocked, scissors widen, upstream product price increases are not fully conducted to daily food, clothing and housing, the overall domestic inflation can be controlled, domestic monetary policy will also be relatively stable, the probability of maintaining neutral, the funding surface is not loose not tight.
Follow-up U.S. stock volatility is greater than A shares, A shares continue to shake the finishing, be wary of the Fed policy changes triggered by the U.S. stock adjustment. After more than three months of adjustment after the year, most of the risks of A shares have been released, although due to the marginal tightening of monetary policy and economic recovery slowdown, it is difficult to have big opportunities, there will not be big risks, the probability is to continue the shock finishing, differentiation will also be more obvious. For the U.S. stocks at a high level, the risk is greater than the opportunity, especially the high valuation of the NASDAQ, should closely track the follow-up economic data, once inflation continues to rise, the Federal Reserve to take action in advance, high-valued growth stocks will bear the brunt. In this regard, investors should be psychologically prepared and ready to respond in advance.