8, 9 The U.S. economic and CPI data have debunked the previous recession trading and excessive interest rate cut trading. Will the pace of the Fed's interest rate cuts change? We believe that two 25bp cuts within the year are still the base assumption, but the possibility of interest rate cuts not meeting expectations next year needs to be watched.

Hot topic thinking: U.S. inflation, another wave?

I. How strong is the U.S. CPI inflation in September, which exceeded expectations?

The U.S. CPI in September exceeded market expectations and showed strong core inflation except for housing. The U.S. CPI in September was 2.4% year-on-year and 0.2% month-on-month, with market expectations of 2.3% year-on-year. Looking at the core inflation structure, vehicle inflation mainly reflects the rise in used car prices in the previous few months, core non-durable goods inflation reflects the rise in import prices this year, and core non-housing service inflation corresponds to the fluctuation in residents' salary growth in recent months.

U.S. inflationary pressures may rise again in the fourth quarter. The main factors may be housing inflation (housing prices) and core non-durable goods (import price transmission). If the strong U.S. employment continues, core non-housing service inflation may also become a source of inflation resilience. Looking ahead to next year, inflation stickiness is still the main tone, and there is a structural secondary inflationary pressure under the cumulative impact of interest rate cuts.

II. Where does the resilience of the U.S. economy in the third quarter come from?

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All kinds of data point to strong resilience in the U.S. economy in the third quarter. For example, the U.S. employment data and September ISM service PMI announced during the National Day holiday. Looking at more high-frequency data, the Citi U.S. economic surprise index has continued to rise since July. According to the latest real-time forecast by the Atlanta Fed, the seasonally adjusted annual growth rate of U.S. GDP in the third quarter may reach 3.2%, higher than the second quarter growth rate.

After the announcement of the U.S. second-quarter GDP, the market's forecast for the U.S. economic growth rate in the second half of the year was less than 2%. Why did the U.S. economy show stronger resilience step by step in the third quarter? We believe that there are two potential supports: fiscal efforts and financial conditions relaxation. The low leverage ratio of the U.S. entity also makes the impact of the hurricane on the economy in the third quarter relatively small.

III. Outlook: The Fed's interest rate cut in November is still the base assumption

The Fed's interest rate cut in November is still a high-probability event. The U.S. CPI data in September did not have a significant impact on the interest rate cut expectations. The unemployment insurance data this week, which was higher than market expectations (hurricane), may be a factor. Since the Fed's current focus on employment is far higher than inflation, a 25BP interest rate cut in November is still the base assumption, but the possibility of interest rate cuts not meeting expectations next year needs to be watched (current trading is more than 100bp).There are two factors that could become "headwinds" for the economy in the fourth quarter. On one hand, the recent rise in U.S. Treasury yields may restrict the easing of financial conditions. On the other hand, under the influence of the new fiscal year, the election season, and the approaching debt ceiling deadline on January 1st next year, it remains to be seen whether the U.S. fiscal policy can continue to exert force in the fourth quarter. The future trend of U.S. Treasury yields needs to observe the economy and the election results, while the U.S. dollar index needs to pay attention to the Bank of Japan's interest rate hike process (Kishida Fumio's dovish stance) and the European Central Bank's interest rate cut process (the European Central Bank holds a monetary policy meeting next week).