As the US CPI rate fell below 3% in July, the market shifted its focus to other risk factors.

The year-on-year growth rate of July CPI released overnight fell below 3% for the first time since 2021, and fell within the official target range set by the Federal Reserve. This means that a critical milestone has been achieved in addressing the issue that has long troubled the Federal Reserve, further supporting expectations for a rate cut in September.

As the market gradually believes that inflation will steadily fall to the target of 2%, where do the risks still exist?

The risk of rising housing inflation still exists.

Looking at the CPI in July, thanks to the slowing of fuel and food prices, commodity inflation has fallen into negative territory, while service inflation is still the biggest driver of inflation.

Housing accounts for the largest proportion of sub-items in service inflation, accounting for two-thirds of core services. CPI data shows that housing inflation in July increased by 0.33% and 5.05% month-on-month and year-on-year, respectively, supercore CPI (core service CPI excluding housing) rose 0.2% month-on-month, but the year-on-year increase fell to 4.73%.

Bloomberg columnist John Authers commented that the more serious concerns come from the real estate market. Although a month of data is not sufficient as a basis for judgment, this data has indeed weakened the market's optimistic expectations that inflation will steadily fall.

However, due to the difference in the scope and calculation method of two indicators, CPI rent and market rent, market rent often leads CPI rent, that is, the rent change indicator in the private sector can more timely reflect the market trend.

At present, the private sector rent index shows that rent inflation has fallen from its high point a year ago and is stabilizing. Omair Sharif of Inflation Insights LLC pointed out that official statistics on housing inflation usually do not fall rapidly.

This also means that the actual level of rental prices may be lower than the official rental level. Authers also added that the Federal Reserve has more sources of data and is unlikely to rely entirely on official data to make monetary policy decisions.

In Authers' view, the overall July CPI data still supports expectations of a rate cut by the Federal Reserve in September, but not to the extent of "aggressive rate cuts", and the rate cut is expected not to exceed 25 basis points.

Brian Rose, a global wealth management economist at UBS Group, believes that whether to choose a 50 basis point rate cut will depend on the August non-farm employment report released on September 6.

Pay attention to the soaring oil prices and the Abe's withdrawal from the election.

With the increasing geopolitical uncertainty, there is a short-term risk of soaring oil prices, which may have a huge impact on the US economy and society.

Brent crude oil rose by 7.8% last week, the biggest weekly gain since April last year. Authers pointed out that considering that current oil prices are lower than the average level in the past 20 years, if oil prices continue to rise sharply, it will have a huge impact.

However, the current US oil price is relatively stable.

Another event worth noting is the news that Japanese Prime Minister Shinzo Abe will not seek re-election.

Considering that yen carry trades have been closed on a large scale in recent weeks, any news from Japan will cause shockwaves in the market.

Authers believes that the impact of Abe's withdrawal from the election on the market largely depends on who will be the new leader, which will gradually become evident over the next few months.

The front-runner candidates for the next president of the Liberal Democratic Party include former Secretary-General of the LDP Shigeru Ishiba, Digital Transformation Minister Taro Kono, heavyweight figure Toshimitsu Motegi, and Economic Security Minister Sanae Takaichi.

Among them, the top three hold a position of tightening policies and supporting the yen, while Takamichi Kishi is a firm supporter of Abenomics, which may mean that Kishida's withdrawal could bring about a tightening of fiscal and monetary environments, and risk assets may suffer heavy losses.

Auther suggests that the Bank of Japan should temporarily maintain its policy interest rate level, given the strong expectation of a rate cut by the Fed in September.

Editor/ping