The most concerned data in the market! Standard Chartered: Next week, the CPI in April in the United States may send a "surprise" to cool down.

Last month, the March CPI of the United States accelerated year-on-year, with the growth rate higher than expected for five consecutive months, and the three-month growth rate of core CPI was higher than expected, which hit the market's interest rate cut expectations. After last week's meeting, Federal Reserve Chairman Powell denied that the next step was likely to raise interest rates, but the signal sent showed that the timing of interest rate cuts was even more uncertain. Nick Timiraos, a journalist who is known as the "New Fed News Agency", later wrote that the market's determination of the Fed's tendency is not so important, but more importantly, the economic and inflation data.

After the Fed meeting, the April CPI to be released next Wednesday is the first heavy inflation data. Will CPI once again exceed the expected growth, which will hit the market's confidence in interest rate cuts? Steven Englander, chief foreign exchange strategist of standard chartered bank, pointed out in a recent report that if we closely observe the housing cost, especially the index related to housing inflation in CPI-the owner's equivalent rent (OER), we will find that there is reason to optimistically predict that housing inflation may go down soon, and it will also push down the core inflation.

After the meeting last week, Powell showed confidence that the decline in housing costs in the future may reduce core inflation. As shown in the figure below, Englander made a regression analysis of the actual and predicted OER, and found that "Powell's optimism may be reasonable", because the analysis showed that "based on the stable regression that has been proved in recent years, the OER will drop sharply in the next few months".

Englander's analysis is based on the experimental series of new tenant rents and all tenant rents constructed by researchers from the Federal Reserve and the United States Bureau of Industry and Statistics (BLS). Even if it is estimated from 2012 to 19, regression can give a good out-of-sample prediction of OER. As can be seen from the chart, the regression results show that the OER increase in the first quarter of this year is an abnormal phenomenon, and the downward pressure will resume in the next few months, and the downward pressure "may be sharp".

The average OER inflation predicted by Englander in the second quarter only increased by 0.29% month-on-month, which is not far from the general range from 2015 to 2019, and is slower than the OER growth rate of 0.48% in the first quarter of this year. This is a very important change, because the weight of OER in the core CPI reaches 33%, so the slowdown of OER's predicted growth rate will reduce the core CPI by 0.06 percentage points, which means that if more CPI components are cooled down by inflation, the growth rate of core CPI may be lower than the expected level of 0.3%, and the growth rate will slow down to 0.2%, or even lower.

Englander's analysis OER tracks the lagging private sector market rent data, which has recently declined. He believes that OER inflation will continue to be weak in the next few quarters. He concluded that this slowdown in OER will encourage people to expect inflation to resume its downward trend, and the decline will be enough for the Fed to start cutting interest rates.

At the same time, Englander pointed out that there are two risks of mistakes in his conclusion. First, the experimental data of BLS and the Federal Reserve on the rents of new tenants and all tenants are released quarterly, so his judgment on quarterly changes may be correct, but his judgment on monthly changes may be wrong. Last year, BLS changed the calculation method, which means that OER is currently estimated based on a small sample of single-family rental houses, which brings the possibility of random fluctuation of OER data. Second, the large demand for single-family housing may lead to a disproportionate increase in rents and will continue to do so. However, most homeowners will lock in a lower mortgage interest rate and will not face an increase in housing costs.

Englander mentioned that he noticed Powell's remark last week: Considering the current situation of market rents, I still expect that these rents will be reflected in measurable housing service inflation over time. Englander pointed out that Powell's confidence in housing inflation surprised him in view of the high OER inflation in the first quarter. Moreover, Powell seems to be surprised that he no longer focuses on the so-called super-core inflation-services that exclude food, energy and housing rents, but instead focuses on reduced rent inflation as a sufficient reason to cut interest rates.

Risk warning and exemption clause

The market is risky and investment needs to be cautious. This paper does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article are in line with their specific situation. Invest accordingly at your own risk.