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The release of U.S. CPI data coincides with the Federal Reserve's interest rate decision day.

Data released by the U.S. Department of Labor on the 12th showed that the Consumer Price Index (CPI) for May unexpectedly remained unchanged. The annual inflation rate increased by 3.3%, which is lower than market expectations. The core inflation rate rose by 3.4% year-on-year, maintaining a near three-year low.

The Federal Reserve held its interest rate meeting in the early hours of the 13th and decided to keep the interest rates unchanged. The closely watched dot plot indicated that the Federal Open Market Committee (FOMC) expects the space for rate cuts this year to be reduced from 3 times in March to 1 time.

How does the inflation data affect the Federal Reserve's confidence in interest rate cuts?

Federal Reserve Chairman Powell stated: "The recent inflation data is more optimistic compared to earlier this year, but we still need to see more positive data to strengthen our confidence." In response to the May CPI data, which was released on the same day and cooled down more than expected, Powell said: "Some members did indeed update their forecasts after the data release, but most did not."

In this regard, a research report from China Merchants Securities believes that Federal Reserve officials are currently very cautious and will not rashly change their views due to just one or two data changes. Instead, they need to observe several consecutive periods of data to confirm their confidence in inflation.

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Huatai Securities pointed out that, overall, the continuous cooling of CPI in April and May shows that the U.S. "disinflation" process is still ongoing and marginally boosts the confidence of the Fed in cutting interest rates within the year.

CICC believes that the non-rent core service inflation, which the Federal Reserve pays more attention to, fell to zero growth month-on-month, mainly affected by the sharp drop in airfare prices and the shift from a significant increase to a slight decrease in automobile insurance prices. Rent inflation remains robust, and core commodity inflation remains low. Overall, this set of inflation data has reduced market concerns about "second-round inflation" and has provided a certain foundation and confidence for the Federal Reserve to cut interest rates within the year.

When will the Federal Reserve cut interest rates?

The latest dot plot from the Federal Reserve shows that compared to the last time, the number of committee members who expect to stay put in 2024 has increased from 2 to 4. All 10 members who originally supported cutting rates by 3 times or more have "changed their stance." Now, 8 support cutting rates twice, and 9 support cutting rates once. For 2025, 9 members estimate the interest rate range to be between 4.00% and 4.25%, making it the most popular option.Federal funds futures indicate that the probability of a rate cut in September approached nearly 70% after the CPI announcement, only to fall back to around 60% following Powell's press conference, once again pointing to November as the likely time.

CICC research report points out that, looking at the median, the number of rate cuts in 2024 is reduced to once, but the number of rate cuts in 2025 increases from three to four compared to previous forecasts, showing that Federal Reserve officials are inclined to remain patient within this year, but the dot plot also indicates that if the economy weakens next year, the Fed can make more rate cuts. No officials in the dot plot indicated a desire for further rate hikes, which is consistent with Powell's previous statement ruling out the possibility of rate increases.

China Merchants Securities maintains its view that there is a high probability of no rate cuts before the election. China Merchants Securities stated that the recent mixed economic data in the United States has made market expectations for rate cuts more volatile, which may increase the importance of the Fed continuing to observe the data rather than relying on economic forecasts.

CITIC Securities believes that the Fed is not expected to cut rates within the year, continuing to control inflation risks, "exchanging time for space," suppressing U.S. demand and inflation. Given that the Fed's dovish stance around November last year led to a significant decline in U.S. Treasury yields, and the significant rebound in rate-sensitive industries such as real estate posed an upward risk to inflation, it is expected that the Fed may learn from the lessons of that time, act cautiously, and prevent a rebound in inflation.

How will the U.S. stock and bond markets perform in the future?

CITIC Securities points out that it is expected that the Fed will not cut rates within the year, continuing to control inflation risks, "exchanging time for space," suppressing U.S. demand and inflation. In the short term, it is expected that the U.S. dollar index and U.S. Treasury yields may be weak and volatile, and the expectation of short-term liquidity easing may bring some benefits to the U.S. stock market.

China Merchants Securities believes that looking ahead, the market will gradually trade on the expectation of rate cuts after the election, with each rebound in U.S. Treasury yields being a prelude to a more sustained and larger decline. Even the U.S. dollar index is likely to be at the end of its strength, and non-U.S. assets, especially assets with Chinese factors, will gradually attract the favor of overseas investors.