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US Inflation Trends: Understanding the Surge of US Inflation
In the lead-up to today’s crucial US inflation report, US equities declined while rates increased. The U.S. inflation rate is anticipated to have increased from 3.3% to 3.3% in July, and core inflation may have stabilized at 4.8%.
Any negative inflation surprise could reawaken the Federal Reserve hawks, but we are still far from pricing another hike in September; Fed funds futures activity estimates that there is a greater than 85% likelihood that the FOMC will decide to hold off on raising interest rates in September.
The main positive risks include rising prices for oil, crops, and rice, while potential downward pressure on housing costs could offset rising raw material costs. In the months to come, housing prices may experience considerable disinflation or deflation, according to the San Francisco Fed’s most recent publication.
They stated that we could experience “the most severe contraction in shelter inflation since the Global Financial Crisis of 2007–2009,” adding that their “baseline forecast suggests that year-over-year shelter. By the middle of 2024, inflation may even become negative as it continues to decline.
The bond market mood is not being helped by the prospect of additional Fed rate increases, particularly in light of Fitch’s downgrading of the U.S. credit rating from AAA to AA+. This is unfortunate for two reasons. In the first place, a lower credit rating implies that the US must make up for the increased risk that investors assume when purchasing US government bonds, which puts extra upward pressure on yields.
US Inflation Trends: The burden of US interest payments will increase
Additionally, The US interest payments will increase as a result of Fed rate increases. The US spends $1.8 billion on interest payments every single day. This figure will reportedly double over the following ten years, making interest payments the federal budget item with the quickest rate of growth.
Additionally, Moody’s lowered the credit ratings of 10 small and midsize US banks, citing increased funding costs, potential regulatory capital deficits, and risks associated with commercial real estate loans. And speaking of banks, earlier this week, on reports of a new windfall tax, Italian banks also experienced a sell-off.
Until Italy clarified its proposed tax on banks’ windfall profits, which stated that the impact may be restricted for some institutions and the levy won’t exceed 0.1% of a firm’s assets, the latter sparked some risk-averse inflows into bonds. The rule that was enacted yesterday won’t have a substantial impact on banks that have already raised the interest rates they provide to depositors.
The U.S. 10-year yield is down to 4.1% after rising to 4.20% in response to a downgrade by Fitch, while the 2-year yield has recovered past 4.80%.
US Inflation Trends: Tumultuous China
Chinese indexes fluctuate. Up due to the Chinese government’s recently announced steps to assist the economy; down due to the sharp decline in exports and imports; concerns about deflation following another round of lackluster trade; CPI and PPI statistics since the beginning of the week; and concerns that the US would restrict investment in China.
The Chinese stock market exhibits a decorrelation with the stock markets of industrialized nations, which is an intriguing observation.
Last week witnessed inflows of $342.23 million into the KraneShares CSI China Internet ETF, the largest weekly inflow in 14 months.
However, China’s population is declining, the local debt crisis is being exacerbated by the real estate crisis, Country Garden’s potential debt default is now making headlines, investor and consumer confidence in the Chinese government will take time to recover, and additional restrictions on US investments in China, particularly in cutting-edge industries like AI and quantum computing, could further stifle demand.
These factors make it unlikely that China will experience impressive growth numbers in the near future.
