Huachuang Securities: The U.S. CPI is likely to peak year-on-year, and the Fed may maintain interest rates this year.

Huachuang Securities released a research report stating that in May, the US CPI continued to rise, breaking through 4%, and it is expected that May will likely be the high point of the US CPI year-on-year comparison. For the Federal Reserve, considering that there are no signs of overheating in the labor market and the economic K-shaped differentiation has not converged, inflation may peak and fall. As long as there is no risk of long-term inflation expectations unanchoring, the bank still believes that the current threshold for raising interest rates is high, and it is inclined to the Federal Reserve maintaining interest rates unchanged this year. For US stocks, if the probability of a rate hike is low, it will block the downside risk of macro policy tightening, leaving only the self-interpretation of industry trends; for US bonds, short-term interest rates are mainly affected by policy rate expectations, with the current 2-year US bond rate at around 4.1%. If there is no rate hike, the likelihood of downward movement may be higher. Huachuang Securities' main points are as follows: US CPI continued to rise in May The US CPI year-on-year rose above 4%, the highest since April 2023, in line with expectations. The year-on-year CPI rose from 3.8% to 4.2%, with an expected 4.2%; core CPI year-on-year rose from3.8% to 4.2, with an expected 4.2%; median CPI year-on-year, trimmed mean CPI year-on-year both rose from 2.8% to 2.9%. CPI increased by 0.5% month-on-month, in line with expectations, previous value was 0.6%; core CPI increased by 0.2% month-on-month, lower than the expected 0.3%, previous value was 0.4%. From a month-on-month perspective, the rise was mainly driven by energy, price increases did not spread, core goods prices turned lower, rent statistics pulse diminished, super core service price increases slowed down, with core CPI slightly lower than market expectations: 1. Energy-related goods and services prices continued to rise. In addition to gasoline (6.8%) and airfare (2.8%), the prices of postal services (5.2%) were also significantly affected. FedEx's fuel surcharge is linked directly to fuel prices, and the US Postal Service began implementing a temporary 8% fuel surcharge for parcel services on April 26, the first time in history, aimed at coping with the rising costs of transportation fuel. 2. Core goods prices (-0.1%) fell for the first time since June last year, and the impact of tariffs on prices may have been largely reflected. This month, apart from clothing, personal computers (or the rise in chip prices due to AI demand), appliances (rise in non-ferrous metal prices), alcoholic beverages and other categories, prices of furniture and household goods, new cars, medical supplies, and other recreational items declined. Of the 29 major subcategories of goods, 13 rose this month, the same as last month, an average of 18 from 2022-23 and an average of 12 from 2015-19. We reiterate that considering the trend of high-frequency price peaks and declines in US imported goods, the impact of tariffs on goods prices is likely to have been largely reflected. 3. Rising oil prices did not lead to widespread price increases. The proportion of CPI and core CPI increases on a month-on-month basis in May continued to decline compared to the previous month and was at a low level since 2017. After the release of the data, the market's expectations for a rate hike did not change significantly, with still an expected rate hike once this year. The number of rate hikes priced in by futures markets increased slightly from 1.0 to 1.06 times. It is likely that the US CPI year-on-year will peak in May It is expected that May will likely be the peak of this round of US CPI year-on-year comparisons. Firstly, favorable base effects. Since June last year, the month-on-month readings of CPI have gradually increased, averaging 0.3%. Secondly, considering that the impact of tariffs on prices has been largely reflected, and the pace of rent growth has returned to the previous central level, given the clear K-shaped differentiation of the economy, the labor market is not overheated, and long-term inflation expectations remain anchored, core inflation on a month-on-month basis may remain at a moderate level of 0.2%. Under the above circumstances, as long as the situation in the Middle East does not see extreme escalation, and oil prices do not rise significantly, even if they remain at the current levels (without additional marginal stimulus), the US CPI year-on-year is expected to gradually decline, although the reading may still be maintained above 3.5%. For the Federal Reserve, considering that there are no signs of overheating in the labor market and the economic K-shaped differentiation has not converged, inflation may peak and fall. As long as there is no risk of long-term inflation expectations unanchoring, we still believe that the current threshold for raising interest rates is high, and are inclined to believe that the Federal Reserve will maintain interest rates unchanged this year. For US stocks, if the probability of a rate hike is low, it will block the downside risk of macro policy tightening, leaving only the self-interpretation of industry trends; for US bonds, short-term interest rates are mainly affected by policy rate expectations, with the current 2-year US bond rate at around 4.1%. If there is no rate hike, the likelihood of downward movement may be higher. Risk warning: Geopolitical conflicts and oil price uncertainty.