Event: The US CPI in May was 8.6% year-on-year, compared with the expected and previous value of 8.3%.

Core conclusion: The U.S. CPI in May hit a new high in nearly 40 years, and the market was basically “collectively misjudged”, mainly because the escalation of the conflict between Russia and Ukraine pushed up energy prices. Affected by this, U.S. stocks fell sharply, U.S. bond yields rose, and the Fed’s interest rate hike expectations rose sharply. Follow-up US inflation expectations have risen again and are expected to remain high in the third quarter. In the short term: the Fed’s interest rate meeting on June 15 is likely to increase by 50bp, focusing on the updated rate hike path, especially the possibility of adding 75bp in July and September; Be alert to the adjustment pressure of short-term US bonds and US stocks, the conflict between Russia and Ukraine is still a major disturbance.

1. The U.S. CPI in May hit a new high year-on-year, mainly due to the sharp rise in energy prices caused by the escalation of the conflict between Russia and Ukraine; the core CPI continued to fall year-on-year, but was still as high as 6%.

2. After the data was released last night (6.10), U.S. stocks fell sharply, U.S. bond yields rose, and the Fed’s interest rate hike expectations increased significantly.

3. Looking back, inflation expectations have risen again. It is expected that US inflation will remain high in the third quarter and will fall in the fourth quarter, but the overall decline may be limited.

4. In the short term, pay attention to three points:

> On June 15th, the Fed’s interest rate meeting will be held, and there is a high probability of raising interest rates by 50bp, focusing on the updated path of interest rate hikes, especially the possibility of adding 75bp in July and September;

>We still need to be alert to the great global stagflation, and continue to remind: In the year, the United States is closer to “inflation without stagnation”, China is closer to “stagnation without inflation”, and Europe is already “stagflation”.

> In the short term, the adjustment pressure of U.S. bonds and U.S. stocks will increase, and historical experience shows that A-shares will also be under pressure.

The text is as follows:

1. The U.S. CPI in May exceeded expectations and reached a new high, mainly due to the escalation of the conflict between Russia and Ukraine, which pushed up energy prices.

> Overall performance: The U.S. unseasonably adjusted CPI in May was 8.6% year-on-year, higher than the expected value and the previous value of 8.3%, and higher than the March high of 8.5%, setting a new high in the past 40 years again; the unseasonably adjusted core CPI was 6.0% year-on-year. It was slightly higher than the expected value of 5.9%, but lower than the previous value of 6.2%, falling for the second consecutive month.

> Sub-item performance: Among the main sub-items of the US CPI, food and energy prices in May were 10.1% and 34.4% year-on-year respectively, both of which were significantly higher than the previous month, mainly due to the escalation of the conflict between Russia and Ukraine. The Lent crude oil, NYMEX natural gas, and CRB food indices rose by 20.3%, 32.0%, and 2.5%, respectively, all exceeding expectations, which also led to a collective misjudgment of the CPI this month.

In terms of other items, the price of commodities excluding energy and food was 8.5% year-on-year, which has fallen for 3 consecutive months, and it is also the first time since April last year that it was lower than the overall CPI year-on-year. Items rose by 5.2% year-on-year, with a slight increase in the transportation sub-item, while the growth rate of the residential sub-item accelerated.

2. After the data was released, U.S. stocks fell sharply, U.S. bond yields rose, and the Fed’s interest rate hike expectations rose sharply.

> Performance of major asset classes: Last night (June 10, Beijing time) after the release of the U.S. May CPI data, U.S. bond yields, U.S. dollar index, and gold prices all rose rapidly, S&P 500 futures plunged rapidly, and the three major U.S. stock indexes Both opened sharply lower.

As of the close, the 10-year U.S. bond yield rose 11bp to 3.16%, the US dollar index rose 0.9% to 104.2, the spot gold price rose 1.2% to US$1,875 per ounce, and the S&P 500, Dow Jones, and Nasdaq closed down respectively 2.9%, 2.7%, 3.5%.

> Changes in interest rate hike expectations: Before the release of the CPI data, interest rate futures implied an increase of 50bp each in June and July, and there is a probability of more than half of them increasing by 50bp in September.

After the CPI was announced, the interest rate futures data became 50bp in June, and 75bp in July and September, and the remaining number of interest rate hikes during the year rose to 9.7 times, reflecting the sharp rise in interest rate hike expectations.

3. Looking ahead, U.S. inflation will remain high in the third quarter, pointing to a further increase in the risk of global stagflation; in the short term, we will be closely watching the path of interest rate hikes after the Fed’s meeting on 6.15, and we also need to be alert to the risks of U.S. bonds and U.S. stocks.

>U.S. inflation outlook: We have pointed out many times in previous reports that U.S. inflation basically follows the principle of “the direction of energy is determined by the sub-item, and the range of other sub-items is determined.”

Under the neutral scenario, energy prices will remain high in the short term due to the impact of the Russian-Ukrainian conflict, but in the medium and long term, as the global economy slows and the impact of the Russian-Ukrainian conflict subsides, energy prices will tend to decline; at the same time, as consumer demand slows, Factors such as the repair of the global supply chain, the core inflation pressure will gradually ease.

According to this calculation, the US CPI from June to September may still remain at a high range of 8.2%-8.6% year-on-year, and there may be a significant decline after October, and it is expected to be around 6% by the end of the year; the core CPI may rebound slightly year-on-year in the third quarter, It will fall back in the fourth quarter and is expected to be around 4.5% by the end of the year.

Affected by this, the risk of global stagflation will be further highlighted. We also continue to remind that: within the year, the United States will be closer to “inflation without stagnation”, China is closer to “stagflation without inflation”, and Europe is already “stagflation”.

>Fed interest rate hike outlook: The Fed will hold an interest rate meeting on June 15, with a high probability of raising interest rates by 50 bp, focusing on the follow-up interest rate hike path indicated by the latest rate hike dot plot, especially the 75 bp hike in July and September possibility.

I tend to think that despite the high inflation, subject to the pressure of economic slowdown, the probability of the Fed raising interest rates by 75bp is not high at present. Whether to raise interest rates by 25bp or 50bp, and when to stop raising interest rates, depends on the situation.

> Prospects for major asset classes: After the release of the CPI data this time, market inflation expectations are on the rise again, and the Fed is expected to raise interest rates. The US bond yields will remain high in the short term, and it is not ruled out that they will rise above the previous highs, which also means that US stocks There is still pressure to adjust in the short term, while gold may experience a phased market.

According to historical experience, when US bond yields rise and US stocks fall, the pressure on A-shares to adjust will also increase significantly.

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