Facing the higher-than-expected U.S. core CPI in August, the market's volatility is far less intense than it was at the beginning of the year.
After the data release, the expectation for interest rate cuts within the year remains around 100 basis points.
Following the "Powell pivot" in August, the market has become less concerned with the reasons and outcomes of rate cuts, focusing instead on speculating about the magnitude of the cuts, with an asymmetric reaction to economic data.
There is a strong reaction to data suggesting a "hard landing," while data indicating "no landing" is difficult to correct the rate cut expectations.
This is because the expectations for rate cuts do not come from the economic logic of the data itself but from factors outside the economy.
The U.S. CPI in August, especially the core inflation, rebounded on a month-over-month basis, which may not change the Fed's decision to start a rate cut cycle in September.
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This is because the logic behind the Fed's actions may contain more political factors, such as the upcoming elections.
However, more importantly, it implies that the U.S. still has a foundation for reflation.
If there are consecutive rate cuts, the U.S. economy will experience reflation.
Looking at the structure of the August CPI, it is still a pattern of service inflation versus commodity deflation.
One of the repair items in the August CPI is housing inflation, which has rebounded for two consecutive months, from 0.17% in June to 0.38% in July and then to 0.52% in August.
This is also the highest level since February 2024, driving core service and super-core service inflation to return to 0.41% and 0.33% month-over-month.
We have repeatedly mentioned before that "housing inflation has a lag relative to housing prices, and a rebound in U.S. housing inflation year-over-year may come in Q3."
This has been confirmed by the August data.
Historically, the rebound in housing inflation also has sustainability.
Another repair item in the August CPI is the rebound in airfare prices.
Amid strong high-frequency data in the service industry and the continuous refresh of service PMI highs since April 2022, the U.S. transportation inflation in the past two months has been relatively weak, showing a certain degree of disconnection; this month's rebound is more like a return to normalcy.
Core goods are still in the deflationary range at the lowest historical level, but with the approaching rate cuts and the downward trend in interest rate costs (auto loans, mortgages, and credit card rates), the boost in demand for goods means that its drag on inflation will also slow down.
The U.S. 30-year mortgage rate has fallen 1% from its peak of the year, corresponding to a slow but continuous upward trend in mortgage purchase levels, which will also drive more demand and price repair for a broader range of durable goods.
The U.S. economy still has resilience, which is to some extent a market consensus, but it is often expressed in a vague concept.
The main reason is that structurally, U.S. data has shown a mixed state in the near term.
A set of homogeneous data can prove the strength of the U.S. economy, and another set of homogeneous data can prove the decline of the U.S. economy.
We return to the origin, based on the most basic elements to judge a recession, using the unemployment rate growth (to better reflect the current short-term labor supply shock) under different attributions, the current U.S. economy is stronger than past soft landing cycles and much stronger than past hard landing cycles.
In the hard landing cycles of 2000 and 2008, the momentum index continued to decline (T=0 is the NBER's lagging judgment of the start of the recession), and the stimulus of monetary policy did not reverse the economic momentum.
This means that the economic momentum continues to decline and remains in a negative range, which is a very useful indicator to judge whether the U.S. is in a recession or not.
The economic performance of past soft landing cycles is also fundamentally different from the current one.
In the cycles of 1995 and 2019 (T=0 is the first time the interest rate cut), the three months before the rate cut were accompanied by the lowest level of economic momentum, which can also be understood as triggering the condition for the start of the rate cut.
However, the overall momentum of the U.S. economy currently shows greater volatility and atypicity.
The momentum indicator fell into the negative range as early as March this year, but with the downward interest rate conditions, a loose credit environment, the continuous rise of U.S. stocks, and the slowing pace of quantitative tightening, the U.S. economy has taken a "quasi-rate cut" repair route.
This also corresponds to the U.S. GDP's Q2 annualized growth rate of 3%.
Therefore, compared with the previous two soft landing cycles, the U.S. economy will face the possible start of the rate cut cycle with the highest momentum level before the rate cut.
Without a significant economic slowdown as a "trigger condition," the recession concerns based on rising unemployment rates also lack support.
This also means that the reflation caused by the Fed's rate cuts is not far away.
Risk warning: There is a large deviation in U.S. unemployment rate data, U.S. corporate earnings are slowing down more than expected, unexpected events in the U.S. elections may occur again, and there is increased uncertainty in U.S. wage growth.