Event: U.S. CPI rose 5.4% year-over-year in June 2021, beating estimates of 4.9%; core CPI rose 4.5% year-over-year, beating estimates of 4.0%. Our view on this is as follows.

  Transportation and housing continue to be the main contributors to the June CPI beat estimates in the U.S. The CPI continued to beat expectations in June, and not only year-over-year, but also year-over-year and seasonally. By item, transportation and housing continue to be the main drivers. As we suggested earlier, housing and transportation price increases have a bulk (oil prices) factors, but also the impact of supply and demand: transportation sub-section, car (especially used cars) prices continue to rise, reflecting the impact of the lack of chips is still continuing; housing sub-section, the improvement in the epidemic has led to a rebound in hotel prices, the pull of the rent sub-section also began to rise rapidly – this and the gradual return of the unemployment rate, the rent sub-section also began to rise. -This is closely related to the gradual return of unemployment rate and the return of labor force to work in big cities.

  As the US economy shifts its focus to the service sector, labor supply and demand conflicts are prominent and inflation is likely to remain high. We previously suggested that as the center of gravity of the U.S. consumer recovery shifts from goods to services, the mismatch between labor supply and demand will be highlighted and the pressure of “wage inflation” will be difficult to alleviate in the short term. In addition, the shortage of supply is also reflected in the supply chain – the logistics chain pressure is rising rapidly, which further exacerbates the mismatch between supply and demand, thus pushing up the pressure of price increases.

  Recent market tightening of the Federal Reserve, high inflation “deaf ears”, or mainly led by the cooling of economic expectations. From the market reaction, CPI released within 30 minutes after the U.S. bonds, gold fell, the dollar rose, inflationary expectations instantly heated up, but soon after the volatility subsided. In fact, since late May, the U.S. market seems to have reacted relatively tamely to high inflation and the Fed’s turn to hawk, with the 10-year U.S. bond rate continuing to fall, the U.S. bond rate curve flattening, and U.S. stocks moving up overall. We have continued to suggest the risk of high inflation in the U.S. in the third quarter since February, and since April inflation exceeded expectations, the market consensus expects rapid convergence to our previous forecast, the June meeting of the Federal Reserve also revised upward to 3% core inflation expectations for 2021, which makes the previously high market inflation expectations since May in turn weakened, we seem to begin to accept the “stage ” inflation, pulling down the nominal interest rates on U.S. bonds. On the other hand, the downward movement in real U.S. long bond rates and the rebalancing of the U.S. equity cycle and growth may indicate that the market has begun to reflect the decline in economic momentum following the fiscal retreat, which is actually very similar to the trend in 2010.

  The more muted the market is, the more attention needs to be paid to the possibility of the Fed releasing an over-expected signal and its potential impact. Our judgment of the Fed’s path is that, although it will eventually be “overturned”, it may still be necessary to “make a show” and give the expected guidance for tightening. For now, the current market on the Fed “hard to tighten” the amount of expected to hit the slower, the higher the possibility of marginal adjustments by the Fed beyond market expectations. Need to continue to pay attention to the July-September Fed operation and its potential impact on the market.

  Risk: Fed monetary policy changes than expected, overseas market volatility than expected, the deterioration of the epidemic than expected.