On February 16th, Atlanta Federal Reserve President Bostic stated that given the current economic situation, the Federal Reserve does not urgently need to cut interest rates. A strong economy requires patience in adjusting monetary policy, and the rate of inflation decline may be slower than market expectations. The surge of global funds during the Spring Festival period is directly related to the latest inflation data released by the United States. The data shows that inflation pressure in the United States is still high, which means that the time for interest rate cuts in the United States will be delayed, and mainstream funds have begun to flow. This has led to a significant decline in the US stock market, including the S&P 500 index. The performance of A-shares after the holiday is not only related to the flow of their own funds, It is also closely related to the global market.

01 | The path of interest rate cuts remains unchanged. The US Department of Commerce Census Bureau released retail data for January, with a month on month decrease of 0.8% significantly weaker than market expectations (ranging from -0.1% to -0.3%). At the same time, retail data for December last year was also adjusted from a positive growth of 0.6% to 0.4%. From the sub items of the report, it can be seen that American merchants have generally ushered in a new year with lackluster performance: even after deducting the well-known weak automotive retail, January retail data still fell by 0.6% month on month (market expectations for a growth of 0.2%). Among them, sales of construction and horticulture decreased sharply by 4.1% month on month, sales of grocery stores decreased by 3%, sales of automobiles and parts decreased by 1.7%, and retail sales of gas stations also decreased by 1.7%. The retail data in the United States will be adjusted for seasonal factors, but there is no inflation adjustment mechanism, so the decline in gas station retail sales also includes the impact of falling gasoline prices. After the data was released, the CME "Federal Reserve Watch" tool showed that there was almost no change in the expected probability of not cutting interest rates in March in market pricing, and the probability of not cutting interest rates in May slightly decreased from 61% to 57%. June is still the time when the market pricing expects the Federal Reserve to start cutting interest rates, and the expected change is not significant.

02 | Inflation did not decrease but instead rose. After the quarterly adjustment in January, the US CPI rose by 0.3% month on month, marking the largest increase since September last year, higher than December last year and market expectations of 0.2%. Compared to the same period last year, the US CPI increased by 3.1% in January, the lowest level since June 2023, but higher than market expectations of 2.9%, compared to 3.4% in December last year. After excluding unstable factors such as fuel and food, the core CPI in January increased by 0.4% month on month, the largest increase since May last year, slightly higher than market expectations of 0.3%, and a year-on-year increase of 3.9%, the lowest level since May 2021, but higher than market expectations of 3.7%. The rise in housing prices is an important factor driving up CPI. The new weight of the US CPI, which came into effect in January this year, focuses more on the service industry and light commodities. Housing accounts for the largest weight in the service industry, accounting for about one-third of the CPI index weight. This part of the price has increased by 0.6% month on month, reaching the highest level in nearly a year, with a year-on-year increase of 6%. Future housing inflation is a crucial part of whether the core inflation rate can be lowered to the Federal Reserve's target.

03 | The expectation of a rate cut in May has decreased. After the release of strong inflation data, the likelihood of a rate cut at the May meeting has sharply dropped from about 60% on February 12th to 36%. US short-term interest rate futures traders have tended to bet that the Federal Reserve will not cut rates before June. According to the Chicago Mercantile Exchange's Federal Reserve observation tool, the market currently expects June to be the most likely time for the Federal Reserve to cut interest rates for the first time, with a probability of at least 25 basis points of interest rate reduction of approximately 75%. From a full year perspective, the market expects that the Federal Reserve has only a 50% chance of making four interest rate cuts this year. However, just a month ago, in mid January, the market once priced the Federal Reserve's interest rate cut of 170 basis points in 2024, with at least six cuts of 25 basis points. The pricing of the interest rate market continues to approach the Federal Reserve's three annual rate cuts estimated in December last year, with the expected rate cuts almost halved. Brian Jacobsen, Chief Economist of AnnexWealth Management, said that the slightly hot CPI has indeed made investors feel "chilly". The Federal Reserve does not have a coherent set of interest rate cutting standards, and the timing of the rate cut may be delayed. If rate cuts are a game of confidence, we don't know when the Federal Reserve will have enough confidence to cut rates, nor do we know if the rebound in inflation will weaken the Fed's confidence in rate cuts. Investors still need to be wary of further fluctuations in inflation expectations. In the data dependency mode, neither the market nor the Federal Reserve can predict, and the data in the coming months will provide more clues for monetary policy. It is highly unlikely that the Federal Reserve will cut interest rates in March, but it may still be too early to determine whether May will turn around.

The June interest rate cut is still the most likely outcome. Compared to CPI, Federal Reserve policy makers prefer an inflation indicator called the Personal Consumer Expenditure Price Index (PCE), which is calculated differently from CPI and has consistently tended to approach the Federal Reserve's 2% target. In addition, CEO of Double Line Capital, known as the "New Bond King", Gonlak, also stated that after CPI "bites back" at the Federal Reserve, PCE is much more important than CPI at this time. Gunlak said that the PCE data to be released on February 29th is unlikely to rise, nor is it possible for the Federal Reserve to discuss interest rate cuts. He added that the three-month annualized core CPI is currently rising, and this trend may continue. In terms of leading indicators, Gunlak stated that the two-year US Treasury yield tells the market that the Federal Reserve will cut interest rates by an average of about 100 basis points during this period. If the Federal Reserve cuts interest rates this year, the magnitude of the cut should be around 50 basis points. Gunlak also does not believe that May is the starting point for the Federal Reserve's interest rate cuts. He added, "If we want to cut rates, it may be in June." He said that the market has also "seriously overestimated" the magnitude of this year's interest rate cuts. 05 Jingtai Viewpoint | The Federal Reserve is More cautious in lowering interest rates during the election year. The Federal Reserve may still adopt significant interest rate hikes or cuts during the election year, but the probability of conducting a turn around operation before the election (before November of that year) is low. The probability of conducting a turn around operation in the short term after the election (after November of that year) is high. On the one hand, from the perspective of the mean change, the Federal Reserve may not have a significant bias towards interest rate hikes or cuts during the election year. On the other hand, from the perspective of the range of changes, the distribution range of changes in the federal funds rate in election years is smaller than that in non election years, indicating that the Federal Reserve may be more cautious in its decision-making in election years.