After the release of the blockbuster data, Trump said "I love inflation" — will the Fed do nothing next week? Gold prices and US stocks have dropped in advance.
The U.S. inflation rate has exceeded 4% for the first time in three years. Data released by the U.S. Labor Department on the 10th local time showed that the U.S. Consumer Price Index (CPI) rose 4.2% year-on-year in May, hitting a new high since May 2023, up from 3.8% in April and far higher than the 2% inflation target set by the Federal Reserve.
This data was released during a sensitive window for U.S. interest rate policy. Next week, the Federal Open Market Committee (FOMC) will announce its latest interest rate decision. At that time, the new Federal Reserve Chairman Kevin Warsh will also preside over the interest rate meeting for the first time. The market is closely watching the Fed's interest rate hike trend this year.
Trump Says "I Love Inflation"
The increase in the CPI this time is basically in line with expectations. Data shows that the current inflation increase in the United States is mainly driven by energy prices. Energy prices rose 3.9% month-on-month, contributing more than 60% to the month-on-month increase in the CPI in May. Food prices rose 0.2% month-on-month; the housing price that the Federal Reserve focuses on rose 0.3% month-on-month, with the increase narrowing by half compared with April.
After excluding food and energy prices, the core CPI in the United States rose 2.9% year-on-year in May, slightly up from the 2.8% year-on-year increase in April, and the growth rate was lower than expected.
According to CNBC, after the release of the U.S. CPI data, U.S. President Trump unexpectedly showed an optimistic attitude in an interview with the media, saying "I love inflation." Trump said that once the U.S.-Iran war ends, inflation will fall as fast as a stone.
During the U.S.-Iran war, Trump talked about the U.S. inflation problem more than once.
Last month, when asked by a reporter to what extent the economic situation of Americans "prompted you to reach an agreement", Trump's answer was quite direct: "I don't consider the economic situation of Americans. I don't consider anyone. I only consider one thing, that is, we must never let Iran have nuclear weapons."
Bond Traders Still Bet on an Interest Rate Hike This Year
It is reported that although the U.S. core inflation data has relieved the pressure on Kevin Warsh to raise interest rates prematurely, bond traders still bet that the Federal Reserve will raise interest rates before the end of the year.
David Kelly of J.P. Morgan Asset Management expects that the Federal Reserve will determine that the latest inflation data is not severe enough to force policymakers to take action, and is likely to keep interest rates unchanged next week.
David Kelly said that the current inflation level is higher than the Fed's ideal range, but he believes that the CPI data in May is likely to be the peak of this inflation cycle.
Market traders generally believe that the Federal Open Market Committee, which is responsible for setting interest rates, will keep interest rates unchanged when it announces its decision on June 17. However, affected by the conflict between the U.S., Israel and Iran which has stirred up the oil and gas market, the probability that the market bets on an interest rate hike before the end of the year is close to 100%. Before the conflict broke out at the end of February this year, the market originally expected the Fed to cut interest rates at least twice before December.
David Kelly said: "Inflation data above 4% is not optimistic, but at this stage, the Fed has no reason to cut interest rates." He believes that the Fed can still wait and see.
The report said that economists believe that even if the war is quickly resolved, there will still be more price increases in the future. This may prompt Fed officials to consider raising interest rates this year. In addition to the initial energy shock, disruptions in the fertilizer market may ultimately lead to higher grocery prices, and rising transportation costs may also push up the prices of various consumer goods.
Another report released by the U.S. Labor Department on Wednesday showed that the U.S. inflation rate has exceeded wage growth for the second consecutive month. As of May, the real average hourly wage in the United States decreased by 0.7% year-on-year in the past 12 months, the largest decline in more than three years, compared with a 0.3% year-on-year decline in April. This means that the purchasing power of households cannot keep up with the rising costs of rent, gasoline, etc.
The rising prices combined with the weak wage growth are putting more pressure on U.S. households, and the current consumer confidence is at a historical low.
Gold Prices and Stock Markets Under Pressure
Recently, the gold price has seen an obvious correction. On June 11, the spot gold price once fell to $4,023.10 per ounce, hitting a new low since last November.
Li Gang, the research director of the China Foreign Exchange Investment Research Institute, told China New Jingwei that the U.S. inflation hitting a three-year high has a dual impact on gold in the short term: on the one hand, high inflation will enhance the attractiveness of gold as an inflation hedge tool, and investors may increase their hedging demand; on the other hand, the market pays more attention to the Fed's reaction.
"The high CPI data has strengthened the expectation that the Fed may raise interest rates or delay interest rate cuts, leading to a stronger U.S. dollar, an expected rise in real interest rates and an increase in U.S. Treasury yields. These factors pose an obvious negative impact on gold, which is a non-interest-bearing asset. The actual market reaction often depends on the comparison between the data and expectations, as well as the subsequent statements of the Fed." Li Gang said that at present, if the market believes that the Fed will adopt a more hawkish policy, the gold price is likely to be under pressure in the short term.
Li Gang analyzed that although geopolitical risks provide some support, the strong U.S. dollar and policy expectations have suppressed the hedging performance of gold. If the Fed chooses to raise interest rates, the gold price is likely to continue to face pressure in the short term and may even test lower levels.
Yang Delong, the chief economist and fund manager of Qianhai Kaiyuan Fund, also believes that the recent continuous decline in the gold price is affected by the rising expectation of the Fed's interest rate hike. It is very likely that Warsh will take the approach of reducing the balance sheet after taking office, which is also a way to withdraw liquidity and will have a negative impact on the gold price.
The U.S. stock market has also adjusted recently. After the release of the U.S. inflation data, U.S. stocks tumbled sharply. The Dow Jones Industrial Average closed down 1.87%, the Nasdaq Composite Index closed down 1.98%, and the S&P 500 Index closed down 1.62%. The chip sector was hit hard, with the Philadelphia Semiconductor Index falling 3.7%.
Yang Delong said that due to the sharp rise in international oil prices, the end time of the U.S.-Iran war is still unclear, and the Strait of Hormuz has been blocked again. These have led to a resurgence of global inflation expectations. The calls for central banks around the world to raise interest rates have become louder, which has directly increased the U.S. dollar index and the yield of U.S. Treasuries. This means bad news for the global stock market and may trigger an adjustment in the stock market, especially the U.S. stock market, which has hit new highs recently and has accumulated a large number of profit-making orders, so the impact on the U.S. stock market is particularly obvious.
The views in this article are for reference only and do not constitute investment advice. Investment is risky, and you need to be cautious when entering the market.
This article is from the WeChat official account “China New Jingwei” (ID: jwview), author: Wei Wei, published by 36Kr with authorization.