What Signals Did the US November CPI Release?

Let's talk about today's key CPI inflation data. This data initially disappointed the market, so how should we interpret it? And what impact will it have on the Fed tomorrow?

The data showed that in November, the US CPI increased by 0.1% month-on-month, slightly higher than the market expectation of 0%, and higher than the zero growth of the previous month. The annual inflation rate reached 3.1%, which was in line with expectations and lower than October's 3.2%, indicating a slight slowdown. More importantly, core inflation rose 0.3% month-on-month, in line with expectations and slightly higher than last month's 0.2%. The annual increase was 4%, also in line with expectations and remained at twice the Fed's target.

Before the data was released, markets were hoping that inflation would be better than expected, as it was last month. However, this was not the case, and the pre-market US stock index fell slightly to express disappointment. This report was basically in line with expectations but not as good as anticipated. The Fed is likely to maintain its hawkish stance. In other words, at tomorrow's meeting, the Fed will continue to acknowledge the achievements of declining inflation, but still emphasize that the mission is not yet complete, and inflation is still too high. Therefore, the possibility of a dovish shift or giving room for a cut in interest rates has decreased. The changes in probability on CME confirm this view, as the probability of a rate hike rose from 0.2% to 1.6%. Although it does not change the decision not to raise interest rates at tomorrow's meeting, it reflects a difference in sentiment.

Looking specifically at this CPI, the main driver of nominal inflation decline was oil prices, which fell 6% month-on-month, causing the entire energy index to fall 2.3%. Food prices remained strong, especially prices for eating out, which rose 0.4% month-on-month and have not changed for three consecutive months, indicating some stubbornness. On the core commodity side, there was a 0.3% month-on-month decline, higher than last month's 0.1%, while services rebounded slightly from last month's 0.3% month-on-month rise to 0.5%.

There are several points worth noting in this inflation data. First, the price of used cars rebounded unexpectedly, with a month-on-month increase of 1.6%, far higher than last month's decline of 0.8%. Housing inflation is another unexpected point to note. This time, it rose 0.4% month-on-month, higher than last month's 0.3%. Among them, equivalent rent for homeowners, which is the indicator of how much rent they could charge for their house, rebounded, causing housing inflation to rise. Everyone knows that housing inflation is very lagging and takes time to come down, but in the past six months, the month-on-month increase has stubbornly hovered around 0.4% without decreasing. Therefore, these two overheated numbers, housing and used cars, have kept core inflation rising.

This inflation data is indeed slightly more stubborn than the market expected, which may cause the Fed to maintain a more hawkish position tomorrow and pour cold water on market expectations for rate cuts. However, overall, this does not change the current market trend. Inflation is still declining, and a soft landing is still expected. The Fed will also cut interest rates next year, only a matter of when and how much. Core inflation for the past six months has already fallen to 2.9%, reflecting an overall cooling trend. These stubborn used car and housing inflations will continue to cool down in the future.

Manheim's used car report shows that in November, wholesale prices for used cars fell by 2.1% month-on-month. The entire index has fallen by 5.8% compared to last year. Wholesale prices for used cars are a leading indicator of retail prices, which means the future CPI index for used cars will continue to decline. As for housing inflation, various rental indices show that rental inflation has fallen to around 3%, and there will be many apartment buildings completed next year, increasing supply and putting downward pressure on rents. Therefore, it is highly probable that inflation will continue to decline next year, giving the Fed more room for a dovish shift. This is good news for US stock investment in the long term. The only risk to watch out for is whether the decline in inflation will turn into a recession. If a recession occurs, there is a greater likelihood of a drop in the US stock market at the beginning of the Fed's interest rate cuts, which should be noted.