After the non-farm payrolls, the August CPI has also exceeded expectations. Although only the core month-on-month has exceeded expectations (0.3% vs. expected 0.2%), the core CPI is regarded as a "barometer," and the core month-on-month exceeding expectations also keeps the core year-on-year steady compared to the previous month (2.45% vs. 2.48%). As for the overall CPI, its rise has been fully anticipated and aligns with market expectations, so there’s no need to elaborate. This data is generally consistent with our previous forecast 【Forecast】August CPI year-on-year steady, month-on-month rebound.

🏵️ Specifically, the rise in the core is mainly due to hotels and airfare, while other core goods and services saw relatively mild price increases, with rent month-on-month at less than 0.2%. This may explain why gold initially fell and then rose after the data was released, and why U.S. Treasury rates initially rose and then fell in this "strange" reaction, as if the data was below expectations, suggesting that the market may believe this increase due to travel and holidays is unsustainable.

However, it is still considered "better than expected," thus the expectation for a rate hike in September has reached 83%. Another possibility is that the market believes the rate hike is already "set in stone," so it starts trading out all the negative news; if it's the latter, it does seem a bit premature.

🏵️ Regardless of how the market anticipates, the Federal Reserve has few choices. The core month-on-month exceeding expectations makes it difficult for dovish officials to find excuses to remain inactive at next week's meeting.

The Federal Reserve has indeed faced challenging times recently. Since the disruption of market expectations by Waller at the FOMC at the end of July, confidence has begun to wane, causing U.S. Treasury rates to rise and stirring up some turmoil, subsequently forcing Waller to make hawkish commitments at Jackson Hole. Then, the non-farm payrolls, PPI, and CPI all exceeded expectations, pushing the Federal Reserve "against the wall," needing to fulfill its hawkish "statement."

🏵️ We mentioned in our commentary after the speech at Jackson Hole What does Waller turning hawkish imply? that from the perspective of maintaining the credibility of the Federal Reserve, the best course of action is to raise rates, unless the subsequent data is very "cooperative." But now the data isn’t cooperating, so if next week they still "force" inaction, how will the market view the previous hawkish statements? It may lead to a greater crisis of trust and uncontrollable U.S. debt.

On the contrary, current data provides "ample reason for action," and raising rates once will not cause much impact on the economy and markets, after all, it has been fully anticipated, and this time the rise in inflation driven by oil prices and airfare seems not to be very sustainable.

Doing so could instead stabilize confidence, push U.S. Treasury term premiums down first, and then even lead to an overall peak decline in U.S. Treasuries. Short-term rate increases or decreases are all factored in advance, all moving "in the opposite direction," similar to how rate cuts are anticipated in 2024 and 2025, and how rate increases happened in 1997.

🏵️ The market often avoids preparing for rate hikes due to fears of their impact, but when it sees that the risk of rate hikes is inevitable, it over-worries about the impact after the hikes, which is unnecessary.

Our difference from the market's perspective is: we do not view rate hikes as a dire threat; rate hikes may not be a bad thing, unless they are consecutive; conversely, not raising rates isn't necessarily a good thing.

It’s not to say that there won’t be disruptions, but short-term rate hikes are more about prematurely realizing expectations; if they do cause disruptions, they may actually present better buying opportunities. However, inaction resulting in short-term boosts could lead to more troubles in the future.

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