Unexpected US Inflation Slowdown: September Rate Cut Almost Certain?
Introduction:
US Inflation Cools Significantly, Interest Rate Cuts Really on the Horizon
High Inflation in Australia, Market Sentiment Tense
European Rate Cuts Do Not Provide Guidance for Australia
Australia's Future Inflation Trends and Policy Expectations
This Thursday, the latest data released by the US Department of Labor showed that US inflation cooled across the board in June, exceeding expectations!
The June CPI rose by 3% year-on-year, slightly lower than the expected 3.1%, and further declined from the previous 3.3%; at the same time, it fell by 0.1% month-on-month, with expectations for a 0.1% increase, marking the first time in four years that the overall CPI month-on-month growth rate turned negative. The year-on-year growth rate of core inflation also hit a nearly three-year low. Expectations for interest rate cuts starting in September have significantly increased, with the probability of a rate cut in July resurfacing.
Recently, Federal Reserve Chairman Powell also mentioned in his speech that the inflation rate may return to the 2% target set by the Federal Reserve by the end of next year or the year after. This statement was interpreted by the market as the Federal Reserve being optimistic about the positive progress in controlling inflation.
The market generally believes that Powell's speech reveals a more dovish stance, expecting the Federal Reserve to start an interest rate cut cycle in September. This expectation is highly consistent with the current state of the US economy, and even the logic behind the Federal Reserve's rate cuts is very clear, why is that?
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After the economic growth and inflation rebound at the end of last year and the beginning of this year, the US economy showed a comprehensive downward trend in the second quarter. Notably, inflation data slid again after rebounding, the labor market cooled down from being hot, the unemployment rate climbed above 4%, and the growth of new employment numbers slowed down, remaining at a low level for several consecutive months.It is evident that the significant slowdown in the U.S. economic growth, the slackening of the labor market, and the comprehensive cooling of inflation have provided a solid basis for the Federal Reserve to initiate rate cuts. The market generally believes that the previous tightening policies have effectively been transmitted to the real economy, leading to a slowdown in economic growth and a reduction in inflationary pressures, creating conditions for rate-cut operations. Whether it is the Federal Reserve's dot plot, market data, or futures prices, all point to at least one rate cut action within the year.
It is well known that changes in interest rates have a subtle relationship with the global macro environment, especially the expectations of rate cuts by the Federal Reserve, which are forming a stark contrast with the potential rate hike decisions in Australia.
Australia's inflation is high, and market sentiment is tense.
Australia's inflation situation shows significant similarities and lags compared to the United States. Both Australian and U.S. inflation trends have fallen after reaching high levels and then rebounded in the second quarter of this year, echoing the rebound in U.S. inflation from the end of last year to the beginning of this year.
Furthermore, the continued tightness in Australia's labor market and high inflation in the service industry have become key factors in driving up overall inflation.
The latest inflation data show that inflation is high in industries related to insurance, health, education, and technology, and the core issue in these industries is the rapid growth of wages. The overheating labor market has become the core issue that Australia's economy and inflation are currently facing. Based on this, Australia's persistently high inflation data have sparked market concerns about the possibility of an interest rate hike in Australia.
Australia's inflation situation undoubtedly poses a huge challenge to the central bank. On the one hand, high inflation may require the central bank to adopt tightening policies to control the rise in prices; on the other hand, the external environment of a slowing global economy may limit its room for rate hikes. Therefore, the policy choices of the Reserve Bank of Australia are particularly complex, requiring a delicate balance between curbing inflation and stabilizing the economy.
European rate cuts do not provide guidance for Australia.
Europe, located in the Northern Hemisphere, is one of the first developed economies to start cutting interest rates in this economic cycle.Starting from May and June, the Swiss National Bank and subsequently the European Central Bank have cut interest rates one after another. Behind this move lies the direct pressures faced by Europe due to the Russo-Ukrainian war, the Israeli-Palestinian conflict, and the previously high energy prices.
The European economy is highly dependent on manufacturing, and these external shocks have had a particularly severe impact on it, leading to a deterioration in economic conditions and even signs of economic recession. Against this backdrop, as inflationary pressures have slightly eased, the European Central Bank began to cut interest rates and may continue this policy for some time in the future to stimulate economic growth.
However, as an energy-exporting country, Australia has a relatively low proportion of manufacturing, which is not the pillar of its economy. Therefore, despite facing challenges such as the Russo-Ukrainian war and rising energy prices, the direct impact of these factors on the Australian economy is relatively limited.
Future Inflation Trends and Policy Expectations in Australia
Given the trend of the Australian economy, especially the similarity with the inflation trend in the United States, people cannot help but pay attention to whether Australia will take a completely different path from the US and Europe in terms of inflation and even face the situation of raising interest rates again.
However, an in-depth analysis of US inflation data reveals that since May, there has been a clear downward trend in US inflation, reflecting the transmission effect of the interest rate hike policy. Since Australia started raising interest rates later and with less intensity, the speed at which it is transmitted to the labor market should be slower.
Looking at leading indicators, such as online job postings, the Australian job market has shown signs of decline in the past two months, but this data is not sufficient to fully reflect the trend of economic slowdown or downward inflation.
Therefore, the inflation data for the second quarter of Australia released at the end of July will have an important impact on the policy stance of the Reserve Bank of Australia's interest rate meeting in August.
Taking into account the US experience, signs of economic slowdown in Australia, weak consumption, declining business confidence, and external factors such as the weakness of the Chinese economy, the Australian Treasury Research Team believes that the possibility of the Reserve Bank of Australia raising interest rates in August is very low, and only a few economists predict that Australia will raise interest rates in the future.When engaging in any investment, please consider the applicability of the information contained in this article based on your personal investment objectives, financial situation, or individual needs, make decisions cautiously, and bear the risks yourself.
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