The CPI data is neither good nor bad, but it is obvious that it has sparked expectations for an interest rate cut

The January CPI inflation continues its downward trend, but the rate of decline was lower than the market expected (with a YoY growth rate of 6.4%, while the market expected 6.2%), and the MoM growth was in line with expectations (with a MoM rate of 0.5%, while the market expected 0.5%). The core CPI was slightly higher than expected (with a YoY growth rate of 5.6%, while the market expected 5.5%).

After adjusting the weighting calculation method this month, the weight of housing in the CPI has increased, while the weights of food, energy, and used cars have decreased, which may lead to a slight increase in MoM. Specifically, the weights of food, energy, and used cars have decreased from 13.8%, 7.9%, and 3.6% to 13.5%, 6.9%, and 2.7% (a decrease of 0.3, 0.9, and 1ppt respectively), and the weight of housing (including owner equivalent rent and primary rent) has increased from 32.9% to 34.4% (an increase of 1.5ppt).

In terms of structure, energy rebounded MoM, used cars continued their downward trend, and the service sector continued to rise but at a slower pace. Looking at the sub-items, energy increased significantly MoM, which became the main reason for the overall CPI's MoM rise. The core inflation remained stable MoM, the drop in used car prices was larger, and the MoM growth rate of rent fell slightly, but the prices of hotels and transportation services increased MoM, and the overall price increase of the service sector narrowed MoM.

Market reaction: This data showed a slight MoM rise as expected, and the YoY decline was slower than expected (higher than expected). In addition, the internal structure was mainly driven by energy, and the rise in rent and service prices was not significant. Therefore, it is difficult to summarize the data as either good or bad, which is also the main reason for the fluctuation and back-and-forth movements of US bonds, the US dollar, and the US stock market. Therefore, this data is unlikely to significantly change the path of inflation and rate hikes, but it also cannot generate more rate cut expectations for the end of the year after the FOMC meeting and non-farm payrolls beat expectations.

The US "real" inflation rate may have returned to around 5%. Therefore, suspending rate hikes or stopping them altogether should not be a problem. By the second quarter, YoY growth rates of CPI and core CPI are expected to decline to around 3% and 4%, respectively, and growth pressures will increase at that time. However, the market's expected timing and magnitude of rate cuts at the end of the year still need to be further confirmed.

In the current inflation environment, the market has too many expectations of "running ahead", which may force the Fed to partially suppress overly exuberant expectations even if it acknowledges the final direction of market trading, which may cause asset prices that include too many expectations to fluctuate.

Apart from rent, service prices are the "last fortress." Currently, the unresolved portion of inflation is mainly concentrated in service prices excluding rent, but because the behavior of companies recruiting and job seekers is subjective and uncertain, there are also variables in forecasting.

There was a need for some correction and reversal of the previously excessive "running ahead" expectations. Therefore, for assets, there is no problem with the general direction of trading slowing inflation and interest rate hikes, but the "running ahead" of the expectations for rate cuts is relatively apparent, so there may be fluctuations and setbacks in the short term. The overall judgment of the US stock market is "cautiously optimistic," and there is a chance of recovery at the end of the year, led by Nasdaq.