Last week's U.S. inflation data delivered a combination punch that extinguished hopes for a near-term rate cut. The CPI and PPI in January were significantly higher than analysts expected, indicating that the price decline in the United States is not smooth, and the inflation in the services sector is still not under control, which means that the Fed will not cut interest rates in March, and the chances of May have also dropped significantly. Bond traders turned to the layout of interest rate cuts in June and July, and the market implied that the policy rate was expected to fall to 83 points this year, which is very close to the Fed's dot plot of 75 points. Compared with the 150-point rate cut estimated at the beginning of this year, market expectations have indeed adjusted significantly.
The reassessment of interest rates led to a broad sell-off in the U.S. Treasury market, with two-year Treasury yields surging 18 points at the moment of the CPI data, and the yield curve moving up across the board. **One after another**, the dollar index rose. Under the dual pressure of the delay in the US interest rate cut and the Bank of Japan's hint that there is no need to raise interest rates, the yen exceeded 150 against the dollar. Oil & Gas continues to climb and give back. The fear index has risen slightly, but it is still at a very low level.
The word that Wall Street economists have been talking about the most these days is "stickier inflation." The US CPI increased by 3 percent year-on-year in January1%, vs 34% and analysts** median 29%；The core CPI is 39%, vs 39% and expected 36%。The rate of inflation in the United States is still on the downside, but it is falling more slowly than expected. Among them, the decline of goods ** is relatively smooth, while the service ** is not as expected. Rental costs remained at **06%, which has become the biggest factor driving prices, and insurance and medical care have also risen significantly.
Readers familiar with this column will know that since the second half of last year, I have been emphasizing that the United States is experiencing inert inflation. The latest figures once again prove that the rapid decline in prices in the United States is almost entirely due to the return to normal of first-chain inflation and energy inflation, while service inflation is not under control. The Fed's tightening policy has little impact on the first-end problem, and its restraining effect is mainly aimed at the demand side, but it seems that the policy effect is not ideal. The main driver of inflation in the services sector is wage** pressures, which are driven by workers' expectations for future prices and the imbalance between supply and demand for blue-collar jobs.
The job market remains so strong at the end of the economic cycle for unprecedented reasons。Inflation expectations have led to a sustained wave of wage increases not seen in a generation. The central bank's expansion of its balance sheet and credit is also eye-popping in scale and tactics. The author believes that this cycle is different from the past cycle, and there may be deviations in the future based on historical experience.
A distinction must be made between a conditional rate cut by the Fed and a rate cut if necessary. The CPI fell back to the 3% level and the PCE tended to 2%, which did open the window for the Fed to cut interest rates, and the monetary policy began to make adjustments conditionally. ButToday, when economic activity is still overheated, whether the Fed is really in a hurry to cut interest rates is a question mark。The Fed's dual goals are to maintain price stability and secure full employment. At present, the United States is at full employment at all, and prices are falling but still high, so the monetary authorities are in no hurry to change the direction of policy. Inert inflation, inert Fed.
The risk of a recession is not high this year, and the Fed does not have to deliberately cut interest rates because of this。On the other hand, the longer interest rates remain high, the more pressure will be on the financial sector, and the chances of accidents in the weakest link will naturally increase. Recently, commercial real estate projects have been frequently thundered, and the stock prices of regional small and medium-sized banks have been severely impacted. It will be interesting to watch in the coming months whether the credit environment is unstable and whether difficulties in debt repayment in commercial real estate will trigger a change in interest rate policy.
It is not difficult to judge the direction of event-led policy changes, but it is difficult to grasp the timing, and once the decision-makers need to take action, it is even more difficult to deduce or quantify the intensity in advance. To borrow a phrase from former US ** Larry Summers, "it makes far more sense for regulation to focus on commercial property lending at the banks they oversee than to discuss abstract or even politically dominated bank capital issues." Mike Barr, the Fed's vice chairman for banking supervision, responded, "Keep an eye on it."
According to IMF figures, Germany has overtaken Japan to become the world's third-largest economy. The German economy will be around 45 trillion dollars, while the Japanese economy is about 4$2 trillion. Japan's economy recorded two consecutive quarters of negative growth in the second half of last year, but the main reason for the widening gap was that the yen depreciated much more than the euro.
Despite this, the entire population in Germany is unhappy with its economy. Germany's industrial production has been shrinking since last May, and the downturn has lasted longer than it has been since the Lehman Brothers crisis. Bankruptcies in the construction and real estate sectors have risen sharply, and the cost of living** has led to a decline in household purchasing power. Under the energy crisis, Germany's proud heavy chemical industry has either moved out or contracted; The auto industry, the economic leader, has been hit hard by declining demand and declining market share, while electric vehicles have been squeezed by imports.
In the face of the economic downturn, Germany has adhered to the orthodox balanced fiscal system, and even had to cut spending because the court has banned the diversion of the pandemic budget to other uses. In the ** budget, defense spending has risen sharply, squeezing other public spending and slowing the pace of environmental and infrastructure projects. Bundesbank President Joachim-Nagel warned that the German economy could continue to shrink in the first quarter.
The problem of the German economy is not only the sluggishness of economic activity in the short cycle, but also the decline in the competitiveness of the industry. Unlike the United States, industry accounts for a relatively high share of the German economy. Germany's manufacturing industry, which relies on the two-wheel drive of large multinational corporations and small and medium-sized characteristic enterprises, has been entrenched in the top of the world's largest surplus countries for a considerable period of time. However, in the past few years, automobile and machinery companies, which are highly dependent on exports, have been affected by the lack of overseas market demand, and the soaring energy costs have seriously affected the profitability and survival of the heavy chemical industry.
Germany needs to strengthen the competitiveness of its industry and restart Industry 40 intelligent and digital process, striking a balance between the pursuit of carbon neutrality and industrial development. In the economic downturn, achieving these goals is particularly stretched, and Scholz**'s own leadership and execution ability have also been deeply criticized by voters. The German economy could become a burden to the EU economy in the coming years, a constraint on the euro's exchange rate, and a room for the ECB to restart easing.
This week's focus is on the minutes of the meetings of the two major central banks. 1) The minutes of the Fed's January meeting are expected to discuss the possibility of interest rate cuts, but the rhetoric may not be very **; With employment and inflation both exceeding expectations, the market impact of this minutes has been reduced. 2) The minutes of the ECB's January meeting, which is estimated to be more neutral, and the rate cut may be after June. It will also be interesting to see if there will be any policy actions from the People's Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC) after the Chinese New Year
This article is purely a personal opinion and does not represent the official position of the institution, nor is it investment advice or solicitation