Huachuang Securities US February CPI Data Commentary: CPI Lower than Expected, Yet US Treasury Yields Rise?

According to the Zhitong Finance APP, Huachuang Securities released a commentary on the U.S. February CPI data, stating that overall, the CPI showed a month-on-month weakening, mainly influenced by the decline in the price increases of food, energy, and super core services. Food and energy prices are highly volatile, while the slowdown in super core service prices mainly comes from the prices of air tickets, accommodation, and car insurance. Currently, there is no systematic cooling observed in the sub-items of super core services. Looking ahead, the recent avoidance of the possibility of "economic recession" in public speeches by White House officials, combined with uncertainties in tariff policies, will still hinder further recovery in risk appetite.

The main points from Huachuang Securities are as follows:

February CPI lower than expected

Both the overall CPI and core CPI were lower than expected, showing a year-on-year decline and month-on-month weakening. The CPI year-on-year fell from 3% to 2.8%, with an expectation of 2.9%; the core CPI year-on-year fell from 3.3% to 3.1%, with an expectation of 3.2%. The CPI month-on-month was 0.2%, with an expectation of 0.3%, and the previous value was 0.5%; the core CPI month-on-month was 0.2%, with an expectation of 0.3%, and the previous value was 0.4%. The breadth of CPI inflation slightly rebounded, with the range of price increases expanding, but it remains within the fluctuation range before 2020.

Structural characteristics of the month-on-month CPI increase decline

1. The increase in food prices fell from 0.4% to 0.2%, with its contribution to CPI dropping from 0.05 percentage points to 0.02 percentage points. Although the impact of avian influenza is still present, egg prices continued to rise by 10.5% on top of last month's 15.2% increase, but the decline in prices of fruits, vegetables, non-alcoholic beverages, and other miscellaneous food items offset this impact.

2. The increase in energy prices fell from 1.1% to 0.2%, with its contribution to CPI dropping from 0.07 percentage points to 0.01 percentage points. Affected by the transmission of international oil prices, gasoline prices changed from an increase of 1.8% to a decrease of 0.9%. Possibly influenced by severe weather, the price increase of electricity and gas services expanded, but gasoline prices had a larger drag.

3. The increase in core goods fell from 0.3% to 0.2%, with its contribution to CPI dropping from 0.06 percentage points to 0.04 percentage points. The improvement in core goods prices mainly came from the decline in the price increase of used cars (0.9%, previous value 2.2%), while prices of entertainment, education, and communication supplies turned to decline, and prices of furniture, home goods, and clothing turned from decline to increase.

4. In terms of rent, the rent for primary residences fell from 0.35% to 0.28% month-on-month, and the equivalent rent for homeowners fell from 0.31% to 0.28%, with their combined contribution to CPI dropping from 0.11 percentage points to 0.09 percentage points. Overall, since September of last year, rents have basically fluctuated slightly around a month-on-month rate of 0.3%, which is roughly in line with the pre-pandemic level, while the average for the first three quarters of last year was 0.4%.

5. The price of super core services fell from 0.76% to 0.22% month-on-month, with its contribution to CPI dropping from 0.2 percentage points to 0.06 percentage points. The decline in the increase mainly relied on hotel accommodation (0.2%, previous value 0.7%), as well as motor vehicle insurance in transportation services (0.3%, previous value 2%), and air tickets (-4%, previous value 1.2%). The price increase of entertainment services declined, while the price increases of utilities, medical services, and other personal services expanded Overall, the CPI has weakened month-on-month, mainly influenced by the decline in the price increases of food, energy, and super core services. Food and energy prices are highly volatile, while the slowdown in super core service prices mainly comes from the prices of air tickets, accommodation, and car insurance. Currently, there is no systematic cooling observed in the sub-items of super core services. This month's core CPI is around the 20th percentile among the months since 2024, slightly lower than last year's month-on-month central value of 0.26%, but this should be considered against the backdrop of a high base last month.

Concerns about stagflation have eased, and risk appetite has rebounded.

Since mid-February, accompanied by a series of weakening economic indicators and the potential upward impact of Trump's tariff policy on inflation, market concerns about recession or stagflation have intensified again. The recent CPI inflation being lower than expected does not merely continue to indirectly confirm recession risks (declining consumer spending willingness); the single-month data and month-on-month structure alone are still difficult to support this argument. Instead, following a robust non-farm payroll report that eased market concerns about "stagflation," the inflation report has again alleviated (at least temporarily) market worries about "inflation." With concerns about stagflation dissipating, market risk appetite has rebounded. This is also reflected in the market's response post-data release, showing a combination of "slight rise in long-end U.S. Treasury yields + slight upward adjustment in the Fed's rate cut path + rise in the U.S. dollar index and U.S. stocks," indicating that market trading may not be based on the logic of "lower inflation expectations, declining consumer spending willingness," but rather on the logic of "easing stagflation risks, stabilizing economic expectations."

The federal futures market still prices in three rate cuts for the year, but the probability of a rate cut in May has dropped from 41.3% to 31%, and the policy rate at the end of the year has risen from 3.577% to 3.622%. The yield on the 10-year U.S. Treasury rose by 2.67 basis points to 4.307%, the U.S. dollar index increased by 0.2%, the S&P 500 index rose by 0.49%, the Nasdaq index rose by 1.22%, and the Dow Jones Industrial Average fell by 0.2%.

Looking ahead, the recent avoidance of discussing the possibility of "economic recession" by White House officials, combined with the uncertainty of tariff policies, will still pose obstacles to further recovery of risk appetite. On a macro level, the further recovery of risk appetite in U.S. stocks may depend on three factors: first, the basic implementation of tariff policies (how reciprocal tariffs will be conducted, the possibility of U.S.-China negotiations); second, the positive stimulus of tax reduction policies; third, whether the secondary inflation risks triggered by tariffs can be initially disproven. This timeframe is expected to be around the second quarter.

U.S. CPI Forecast for Late This Year

We maintain the forecast for U.S. CPI year-on-year unchanged for this year, namely: core CPI year-on-year is about 3%, and CPI year-on-year is about 2.5%. For Q1-Q4, CPI year-on-year is approximately 2.7%, 2.3%, 2.4%, and 2.5%, while core CPI year-on-year is 3.1%, 3.0%, 3.0%, and 2.9%, respectively. Due to base issues, the further decline space for core CPI year-on-year this year may be limited.

Risk Warning: Uncertainty of Trump's policies, U.S. inflation exceeding expectations