US headline CPI for September 2023 increased higher than expected. Another war has erupted in the Middle East region, the world's oil supply source. Meanwhile, China is deepening into the real estate sector crisis, dragging the banking financial sector to the brink of crisis. There are too many factors causing the market to fear the possibility of inflation rising again, causing the Fed's efforts of more than 1 year to collapse.
This week's Macroeconomic article from Viet Hustler, based on a comprehensive view of economic and geopolitical risks, will clearly analyze which factors are likely to change the current direction of US inflation.
The main contents of this article include:
Viet Hustler's Summary and Commentary on the September 2023 Inflation Report
Analysis of shocks that could change the direction of inflation includes: Israel-Hamas war, US public debt tensions, and the impact of economic fluctuations in China.
Disclaimer: Some of the information below is written based on the personal views of the Viet Hustler author team and is not investment advice at all.
Summary and Commentary on the US Inflation Situation
US headline inflation in September rose higher than previous economist forecasts, although core CPI inflation figure was as expected.
September 2023 Headline Inflation:
+0.4% m/m (>expected +0.3% m/m)
+3.7% y/y (> expected +3.6% y/y)
Core Inflation September 2023: +0.3% m/m and +4.1% y/y (as expected)
It's quite easy to guess why headline inflation increased higher than expected: food prices are still rising slightly, while energy prices continue to surge over the past 2 months.
The main reason core CPI has mainly increased monthly (m/m) is still due to the impact of rising housing inflation:
Super core services inflation (excluding housing costs) has once again ticked up slightly above the pre-Covid average (possibly due to higher medical costs).
However, looking at this year's inflation figures, it's clear that seasonally unadjusted Core CPI m/m this year is 'normalizing' toward 2019 levels (pre-Covid).
The 6-month average inflation level points to a downward trend, but the 3-month average points to an upward inflation direction:
But it should also be emphasized that over the past 3 months (July-September 2023), the effects of summer vacation and back-to-school may have driven increased spending.
Nevertheless, the path to bringing inflation back to the Fed's 2% target will likely be prolonged.
In the September 2023 FOMC Minutes: The Fed also emphasized it may maintain tight monetary policy for some time and cautiously consider 'higher for longer' interest rates.
The Fed's balance sheet reached its lowest level since June 2021 this week: down more than USD 1,000 billion from the April 2022 peak.
The market still largely bets the Fed will keep rates unchanged at the November 2023 meeting.
But there is a 28.8% chance the Fed will still hike rates in December 2023.
Meanwhile, inflation expectations (University of Michigan survey) have all risen:
1-year inflation expectations (1Y) rose to 3.8%
Medium-to-long-term inflation expectations (5Y-10Y) rose back to 3%.
Variables that could affect inflation in the US
As Viet Hustler has previously noted:
Inflation is still on a downward trend (whether fast or slow at times). The only reason inflation could rise again is possibilities of major shocks such as oil price shocks (like in the 1980s), wars, and pandemics…
Although Viet Hustler still maintains the view that it's unlikely to have a shock large enough for inflation to rise again (especially with the Fed maintaining high interest rate policy), in this article, Viet Hustler will review the possibilities of these shocks below:
War shock on crude oil prices
The Russia-Ukraine war remains unresolved when the Israel-Hamas war erupts in the Islamic world - something the entire world does not want.
This war could directly cause a shock to crude oil prices:
Although Israel is not an oil producer, concerns about the war's impact on the Middle East region and Iran (a country supporting Hamas) potentially facing Western sanctions have driven oil prices up last week:
Crude oil prices surged on Monday last week after news of the war breaking out…
Bloomberg also outlines 3 scenarios in which this war could impact the economy depending on the escalation of the conflict…
(… based on previous regional wars in history: 2014 Gaza war, 2006 Israel–Lebanon war, and Gulf War, 1990–1991)
Bloomberg's predictions include:
Crude oil prices could rise accompanied by increased volatility (in the 2 worse scenarios)
Global GDP could decline from -0.1% to -0.3%
Inflation could increase from +0.1% to +1.2% (worst-case scenario)
Major US tech companies will face certain losses at their branches in Israel.
Additionally, some mineral supplies from Israel will be reduced:
The Dead Sea region (Dead Sea) is rich in minerals and a major potash export center. This war could mildly affect fertilizer prices and the agricultural sector.
Public debt shock: impact on economic growth more than on inflation
In recent weeks, Viet Hustler has warned about the public debt variable that could shrink economic growth due to tightened spending by people and government.
Related articles:
Overall, public debt has more impact on economic growth and can cause crises in the financial banking sector.
However, public debt is unlikely to directly cause inflation to rise again.
The only impact of public debt on inflation could be governments and people tightening spending due to the debt repayment burden.
However, for the US government: more than 90% of public expenditures are politically non-negotiable to cut (politically non-negotiable).
This is the main difficulty preventing the two US ruling parties from negotiating for many months, leading to the risk of government shutdown a few weeks ago.
And this is also the reason why cutting government spending is not America's hope for mitigating inflation.
Everything depends solely on whether consumer spending increases or slows down: the main variable affecting inflation that the Fed can influence through monetary interest rate policy.
FYI: The rate of withdrawals from 401k for “urgent reasons” (401k hardship withdrawal) at Fidelity rose to an alarmingly high level in 2022.
This is the first sign that consumption may slow down (as savings were eroded by inflation in 2022) after the difficulties people faced paying living expenses last year.
Shock from China's deflationary economy and recession risk
China's CPI growth continued to stagnate (~0%) in September, while PPI growth remains negative:
Accompanying that, export volume (one of China's most important economic sectors) continues to decline for 5 consecutive months:
Meanwhile, bank runs have begun in China starting from Cangzhou Bank: depositors fear the collapse of Evergrande and Country Garden will cause this bank to default.
A few months ago, China's largest real estate developer, Evergrande, filed for bankruptcy in the US.
Country Garden nearly missed its international bond payments for August 2023, and now is likely to miss another debt payment of ~$60 million.
China's high-yield real estate bond index has fallen -82% from its previous peak.
FYI: The residential real estate sector accounts for 25% of China's total GDP.
And clearly, China's real estate is heading into recession territory…
… while China's technology sector is being tightly controlled and managed by the government.
Related articles: China and the 32-month crackdown on big tech.
The question is when will China officially fall into an economic recession?
If China officially falls into recession, China's production output is likely to decline.
=> This will create mild pressure on import commodity prices in the US and major Chinese importing countries.
However, the Chinese government is taking positive steps to change China's economic structure, avoiding reliance on real estate investment and shifting focus back to industrial development:
The clearest sign of the Chinese government's economic policy intentions is the shift in credit allocation from real estate to industrial manufacturing:
This week, there is also news that China is planning to roll out a new stimulus package to support its economy.
CONCLUSION
US headline inflation for September 2023 rose higher (than expected) to +3.8%, mainly due to the rebound in energy prices. For the core CPI growth figure, high housing prices remain the key driver, although super-core services prices are still rising again, especially medical costs.
With headline inflation figures higher than expected over the past 3 months, the Fed is very likely to keep rates high for an extended period as it needs more time to bring inflation back to the 2% target. However, even though the September 2023 FOMC Minutes appear quite hawkish, whether the Fed will hike rates one more time by year-end remains uncertain. The market still largely expects the Fed to hold rates steady in the final months of the year.
Many concerns are being raised about whether inflation will rise again, but Viet Hustler maintains that inflation is still on a downward trajectory, albeit very slowly and mainly declining in super-core CPI items. Some variables that could cause an unexpected rebound in inflation include:
Risk of high oil prices due to the Israel-Hamas war. However, the US is becoming increasingly self-sufficient in crude oil and energy.
Risk of uncontrolled public debt increase in the US: public debt risk may impact recession risk more than high inflation. Even recession could somewhat reduce demand-driven inflation.
Risk of recession and deflation in China's economy: this could affect global goods production. However, China is making positive changes in redirecting capital from the real estate sector back to manufacturing, ensuring goods supply in the near future.
Therefore, at least for now, Viet Hustler assesses that geopolitical and economic globalization variables are not yet able to cause US inflation to rise again. However, these variables could fully lead the US into an early recession.
Comments (0)
No comments yet
Be the first to comment
Login to comment