The Spring Festival is approaching, and the inflation data released by the Chinese Bureau of Statistics has attracted widespread attention. At the same time, the economic data of the United States is also undergoing a severe test. Although China's CPI data may be the envy of Fed Chairman Jerome Powell, Powell is not rash in the face of the current state of the US economy. With the scale of overnight reverse repos sharply reduced, Powell may adopt a strategy of reducing the scale of balance sheet reduction before considering interest rate cuts, and even does not rule out the possibility of stopping the sale of US bonds.
There has been a clear change in economic trends between China and the United States, and a watershed seems to have arrived. Let's look at the inflation data. The January CPI data released by the Chinese Bureau of Statistics showed a mixed picture. We need to be more wary of deflation than inflation. The latest data shows that the CPI in January increased by 0 year-on-year8%, the decline widened from the previous month, which is the fourth consecutive month**. The good news is that the month-on-month ratio is still **, with two consecutive months of growth. Moo-Q means that prices are starting to begin, while YoY** is mainly due to a higher base in the same period last year. The current CPI data needs to be vigilant, but not overly concerned. In contrast, the CPI data in the United States is enviable. Not long ago, the United States released the core PCE price index for December, which was **2 year-on-year9%, although the increase has narrowed, is still significantly above the Fed's target. Next week, the US will release new CPI data, and the last time it appeared**, it will be crucial whether the CPI slows down as the market expects. With inflation data yet to fall back to 2%, the labor market remains strong, and the U.S. can't afford to move lightly despite the urgent need for a rate cut to stimulate the economy.
At the moment, the most urgent need for interest rate cuts is not American companies or ordinary households, but the United States**Biden. Biden needs to make sure that the economy does not fall into recession this year and accumulate weight for his own re-election. Although Powell is willing to cooperate, he can only stand still for now. The declining use of overnight reverse repos may provide a new reason for Powell. The latest size has fallen to 532.4 billion, compared with more than 1,000 billion at the beginning of November last year. The persistence of the data** indicates that money market liquidity is drying up. The Fed's monetary tightening policy includes raising interest rates and shrinking its balance sheet, and since interest rates cannot be lowered for the time being, the Fed may consider reducing the size of its balance sheet. If the final decision is made to reduce the size of the monthly sell-off of US Treasuries, it will help alleviate the liquidity crisis. In this context, the contrast between China and the United States appears rather passive. China currently has a lot of policy space, and in addition to the round of RRR cuts that have just been implemented, it is likely to see an LPR rate cut soon. There are rumors that many banks are preparing for a new round of deposit rate cuts. Due to the good inflation environment in China, there is considerable room for adjustment in both monetary and fiscal policies. The divergence in economic trends between China and the United States is already beginning to emerge and may become more pronounced in a few months.
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