Bitunix Analyst: CPI gives the market breathing room, but high deficits, yen and energy risks still drive up long-term capital costs
Comparing news, the US CPI increased 0.1% monthly and 3.4% per year in July, and the core CPI increased 2.5% per year. Overall inflation performance was moderate, and the decline in energy prices also offset the upward pressure on some housing costs. After the data was released, the market's pricing for the Fed's September rate hike was reduced from about 50% to around 40%, and short-term policy pressure eased somewhat.
But this CPI was insufficient to directly translate into loose expectations. The US fiscal deficit is still widening. The cumulative deficit for the first 10 months was close to 1.8 trillion US dollars, the size of treasury bonds was close to 40 trillion US dollars, and interest expenses continued to rise. In this context, the US needs to continue to issue a large number of treasury bonds, and the yield on 10-year US bonds has risen to a high level since 2007, and the 30-year yield is closer to 5.25%, reflecting the fact that long-term capital costs are driven by a combination of fiscal supply, inflationary stickiness, and market risk premiums.
Therefore, the key to the current US interest rate market is not only whether the Federal Reserve will raise interest rates in September, but whether long-term yields will continue to rise due to fiscal deficits and treasury bond supply even if the Fed keeps interest rates unchanged. This also means that financial conditions will not necessarily improve at the same time as policy interest rates fall. For overvalued and highly leveraged assets, long-term returns are still an important source of pressure.
On the Asian side, the yen once again approached the 160 mark. Japan's PPI increased 7.2% year on year in July, heating up expectations for the Bank of Japan's September rate hike. If Japan's monetary policy is further normalized and the Japan-US spread narrows, global capital allocation and Japanese yen arbitrage transactions may be affected.
Gold, on the other hand, has benefited from reduced risk at the end of interest rate hikes, the weakening dollar, and renewed support from fiscal uncertainty, but it is currently closer to a tactical rebound driven by interest rate expectations rather than a simple interest rate cut transaction. Subsequent Jackson Hole meetings, inflation and employment data will still determine whether the gold market can continue.
On the other hand, the Russian-Ukrainian conflict is bringing energy and food supply risks back to the global market. Russia and Ukraine have continued to attack Black Sea ports, energy facilities, and commercial vessels recently. Ukraine is in the peak season for grain exports. If Black Sea shipping is further disrupted, it may boost the prices of wheat and related food, and also complicate the risk of energy inflation that already exists.
Overall, the July CPI reduced the pressure on the Federal Reserve to raise interest rates immediately, but it did not remove the capital cost constraints created by America's high deficit, high debt, and high long-term returns. Next, the core of global asset pricing will gradually focus on the two forces of whether inflation continues to cool down and whether fiscal supply pushes up long-term interest rates. For highly volatile assets such as Bitcoin, in the short term, we still need to focus on US dollar liquidity and long-term yield on US bonds, rather than just observing the Fed's policy interest rate itself.
