Macro Economy Weekly | Bitmidas
2023–09–19
Inflation Rebounds, Fed’s Huge Losses Support Inflation
The rise in crude oil prices has led to a rebound in energy inflation. The Federal Reserve reported a loss of US$57.3 billion in its semi-annual report. The losses are still expanding. The U.S. deficit will expand and eventually turn monetary policy into inflation…
Important Data of the Week
The U.S. seasonally adjusted CPI annual rate in late August recorded 3.7%, exceeding the previous value of 3.2% and the market forecast of 3.6%, a new high since May. It picked up in the second month.
The seasonally adjusted monthly CPI rate in the United States in August was 0.6%, exceeding the previous value of 0.2% and the market forecast of 0.6%, a new high since June 2022.
The U.S.’s seasonally adjusted core CPI annual rate in August was 4.3%, the lowest since September 2021, and has fallen for six consecutive months.
The U.S. quarterly adjusted CPI rate in August increased by 0.3% (0.278%) compared with July, marking the first accelerated increase in six months.
In late August, the seasonally adjusted annual energy inflation rate recorded -3.6%, much higher than the previous value of -12.5%. Crude oil prices rose sharply, resulting in the decline of source inflation.
The annual rate of adjusted inflation at the end of August was 4.3%, lower than the previous value of 4.9%, marking the 12th consecutive month of decline.
The annual rate of housing inflation in August was 7.3%, which was not seasonally adjusted, lower than the previous value of 7.7%, marking the fifth consecutive month of decline.
In the United States, the annual rate of second-hand car and truck inflation by the end of August was recorded at -6.6%, lower than the previous value of -5.6%; the annual inflation rate recorded 2.9%, lower than the previous value of 3.5%;
Through the breakdown of inflation, we can see that it was the rebound of energy inflation that drove the overall inflation to rise.
The annual PPI rate in the United States in August was 1.6%, doubling the previous value of 0.8%, and the monthly PPI rate of 0.7%, far exceeding the previous value of 0.4% (revised +0.3%), the largest increase in more than a year, with a 20% surge in gasoline prices being the main reason for the increase.
In the July 2023 reports, the three major agencies IEA, EIA, and OPEC predicted global crude oil demand in 2023 at 10208.03, 10116.46, and 10200.00 (10-thousand-barrels/day), and by a comparison of an increase of 222.89, 175.13 and 244.00 (10-thousand-barrels/day) in demand in 2022. The expansion of oil demand has significantly boosted the rise in crude oil prices and brought a significant rebound in energy inflation.
In their July 2023 reports, the IEA, EIA, and OPEC forecasts of global crude oil supply in 2023 were 10155.52, 10110.10,10087.47 (10-thousand-barrels/day), and by comparison of an increase of 159.73, +125.11, +90.47 (10-thousand-barrels/day) in supply in 2022. The statistical results reported in June were +25.52, -27.15, and +5.62 respectively, supply will be less than demand. This gap will support the oil price at a high level and rise more easily.
The U.S. retail sales rate in August recorded a monthly rate of 0.6%, exceeding expectations of 0.2%. The previous value was revised down from 0.70% to 0.5%.
A slowly cooling job market coupled with the resume of student loan repayments will limit future spending. Atlanta Fed GDPNow model lowered the U.S. third-quarter GDP forecast from 5.6% to 4.9%.
Federal Reserve Balance Sheet
The Federal Reserve’s balance sheet continues to shrink, with the current balance sheet shrinking slightly from US$2.539 billion to US$8.098779 billion. The plan is still proceeding as originally crafted.
Recession Indicators-U.S. Debt Inversion
CPI rebounded this week, and the decline in energy inflation narrowed significantly. Expectations for another interest rate hike within the year increased, and the 2/10 yields rose significantly. As of the time of this report, the 2/10 inverted yield spread is at 70.04bp, still deeply inverted.
Market Performance
Crude oil prices rebounded, CPI exceeded expectations and the market expected the Federal Reserve to make hawkish comments, which boosted the U.S. dollar. The U.S. dollar index strongly broke through 105 and maintained its upward trend.
The rebound in U.S. CPI and the expectation of another interest rate hike this year will limit gold prices, but it is still possible to keep interest rates unchanged in September. The short-term impact on Gold is limited, and gold is still running between $2000~$1900.
CPI rebounded, but other items except energy inflation fell, which had a limited impact on the market. The S&P 500 was in the 4330 area. It’s now centered around 4450 and oscillated between 4370~4581. This situation is likely to continue.
This week, US CPI rebounded, but other items except energy inflation fell, which had a limited impact on the market. BTC is recovering after reclaiming the critical point of $25,000.The expectations for the approval of BTC spot ETFs are heating up, which is expected to bring inflows of hundreds of billions of dollars. BTC long-term consolidations are extended.
Summary
Saudi Arabia’s production cuts have helped crude oil prices rebound from the bottom. The three major energy agencies have increased their forecasts for global crude oil demand. The lack of demand has helped crude oil prices rise, leading to a sharp rebound in energy inflation, which is expected to continue.
Despite the rise in energy inflation, the current U.S. CPI has declined, indicating that the current U.S. federal funds rate is restrictive enough. To control inflation, keeping interest rates unchanged in September is still a high-probability scenario. But as the cost of PPI rises, and energy shortages continue, crude oil prices will be more likely to remain high or rise again, which will eventually transmit costs to the consumer side. Therefore, the market predicts that there will be another interest rate hike within the next year.
The Federal Reserve reported a loss of US$57.3 billion in the first half of the year and is expected to lose more than US$100 billion in 2023, with a loss of fair value of 1 trillion US dollars. This means the U.S. government will have to borrow more money, which could reach $2 trillion by the end of this fiscal year. The state’s debt will eventually be monetized by the Federal Reserve and transformed into inflation borne by consumers. If so, it is even more difficult to return to the 2% target.
Overall, the current interest rates are sufficiently restrictive, but the shortage of crude oil may continue to drive crude oil prices up. As a result, inflation may be transmitted from energy to other items, prolonging the high-interest rate cycle. Next week, the Fed will update the dot plot, and the Fed may once again flexibly adjust its monetary plan based on the current situation.
Completion time of this report: 2023–0916–09:50 (UTC+8)
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