The CPI data is lower than expected, and the Federal Reserve’s interest rate cut window may open earlier

(1) If CPI is higher than expected, the expectation of Fed interest rate cuts will be postponed, US bond yields will rise, and gold prices may fall under short-term pressure

(2) If the CPI meets or falls below expectations, the expectation of the Federal Reserve cutting interest rates will remain, the US dollar index will weaken, and gold prices may rise

Core data: Inflation cooling rate exceeds expectations

On the evening of March 12th at 20:30, the US Department of Labor announced that the Consumer Price Index (CPI) for February increased by 2.8% year-on-year and 0.2% month on month, both lower than market expectations of 2.9% and 0.3%. Excluding food and energy, the core CPI was 3.1% year-on-year and 0.2% month on month, which was also lower than the expected 3.2% and 0.3%. This is the first time that US inflation data has fallen after four consecutive months of rebound, and the year-on-year growth rate has hit a new low since April 2021.

According to the sub item data, the housing cost increased by 0.3%, contributing nearly half of the overall increase, but the moderate increase in healthcare and used car prices was offset by a 4% decrease in airfare prices and a 1% decrease in gasoline prices. It is worth noting that the year-on-year increase in egg prices reached 58.8%, becoming the main driving force behind the rise in food prices for the second consecutive month.

Market reaction: Expectations of interest rate cuts are heating up, asset prices are fluctuating

After the data was released, the US dollar index plummeted to 103.47 in the short term, and then fluctuated and rebounded to 103.73. The three major stock indexes in the US opened higher, with the Dow Jones Industrial Average rising 0.49% at one point, led by technology stocks, and Tesla and Nvidia rising more than 6%. The volatility of US Treasury yields has intensified, with the 10-year yield briefly dropping to 4.28% before rebounding to 4.31%, while the 2-year yield remains around 3.99%.

The gold market continues to be strong, with COMEX gold futures closing up 0.77% at $2943.4 per ounce, hitting a high of $2948.9 during trading, approaching a historical high of $2956. The net inflow of gold ETFs has exceeded 300 million yuan for 5 consecutive days, indicating strong demand for safe haven in the market.

Policy outlook: The Federal Reserve faces a dilemma

Despite the decline in inflation data, there is still uncertainty in the Federal Reserve’s policy path. The current market expects the probability of the first interest rate cut in June to rise to 68%, with a cumulative interest rate cut of 75 basis points within the year. However, Federal Reserve Chairman Powell recently emphasized that there is no rush to cut interest rates, stating that economic data and the impact of trade policies need to be observed.

Analysis points out that the current data does not reflect the steel and aluminum tariffs that came into effect in early March and the impact of the second round of tariffs on China, and the decline in inflation may only be a “calm before the storm”. According to calculations by CITIC Securities, if the 20% tariff imposed on China is fully transmitted, it will push up the PCE index by 0.34%. In addition, the year-on-year increase of 4.2% in housing costs is still significantly higher than the 2% target, indicating that inflation stickiness still exists.

Market Impact: Investment Strategies in the Long Short Game

For the capital market, there is a clear differentiation of institutional perspectives:

Gold market: Short term supported by expectations of interest rate cuts, but if inflation rebounds or leads to a strengthening of the US dollar, gold prices may face a pullback. Goldman Sachs maintains a target price of $3000 and recommends focusing on the support level of $2900; Morgan Stanley warns of technical overbought risk.

US Treasury Market: Zhejiang Merchants International believes that under the risk of stagflation, the 10-year US Treasury bond interest rate is expected to drop by 4%, and it is recommended to buy on dips above 4.3%.

US stock market: Goldman Sachs lowers its year-end target for the S&P 500 to 6200 points, suggests focusing on defensive sectors; Citigroup has upgraded its rating on Chinese stocks to ‘increase holdings’ and is optimistic about the performance of the technology sector.

In the future, we need to focus on:

1. On March 20th, the Federal Reserve’s interest rate meeting expressed the path of interest rate cuts
2. Details and implementation intensity of the “equal tariffs” policy in early April
3. Verification of Inflation Transmission by PPI Data on March 19
4. The geopolitical situation in the Middle East and the implementation of the Russia Ukraine ceasefire agreement

Overall, the February CPI data provided policy buffer space for the Federal Reserve, but the lagging impact of tariff policies and the risk of economic slowdown may still complicate inflation trends. Investors need to remain flexible, closely track data validation and event progress, and seize structural opportunities in long short games.