Event Sniper | US July CPI: Short-term Bullishness and Medium-term Risk Spillover

💡 Key Insight

– US July CPIYoY +3.4%, MoM +0.07%; Core CPI YoY +2.5%, MoM +0.22%Broadly in line with expectations; the tail risk of a secondary surge in inflation did not materialize.

– Coupled with a net decrease of 23,000 in July non-farm payrolls, the CME FedWatch tool shows the probability of a September rate hike has dropped from48.4% to 42.1%, meaning the Federal Reserve was not forced to take immediate action in September.

– Short-end rates declined, while long-end rates failed to fall in tandem due to structural constraints. Tech stocks led the gains, and gold, up 1.5% on the day, emerged as the clearest beneficiary.The medium-term trajectory remains dependent on the path of core PCE and the evolution of default risks in private credit.

1. CPI Component Breakdown: Energy weighed on the headline figure, while underlying inflation stickiness persists.

Chart 1: Comparison of July CPI Data and Forecasts

Sources: WIND, JPM, Fitch Ratings, Morgan Stanley

Breakdown by component:

– Energy prices: -1.5% month-over-month (gasoline -2.9%), the primary driver of the overall moderation

– Food prices: +0.1% month-over-month, largely stable

– Housing costs: +0.1% month-over-month, still contributing about two-thirds of the monthly increase, with notable stickiness

– Airline fares: +2.2% month-over-month, signaling a rebound in service prices

– Healthcare service prices: +0.4% month-over-month

Summary: The mild CPI reading was primarily driven by a drag from energy prices; underlying inflation exhibits a structural pattern of "sticky housing costs, recovering services, and stabilizing goods."

2. Policy Implications: The majority holds steady; August data is the key variable.

- Core PCE remains near3.3%levels, with major banks forecasting the month-on-month change at0.22%

- If an energy rebound coincides with a recovery in services, keeping core inflation stuck within the0.2%-0.3%range, the Fed can maintain its relatively tight stance.

- This data release is unlikely to change the stance of the three dissenting FOMC members in July, nor will it prompt the majority to support a rate hike.

– For the majority, economic data released in August will be the decisive factor for policy decisions.

3. Immediate Market Reaction in Asset Prices

Chart 2: Immediate reaction of key interest rates and market prices following the CPI release

Sources: Wind, JPMorgan, Fitch Ratings, Morgan Stanley

– 2-Year US Treasury: Yield ↓ to 4.199%, cooling expectations for short-end rate hikes

– 10-Year US Treasury: Flat at 4.686%-4.692%

– 30-Year US Treasury: ↑ to around 5.25%, with the long end constrained by structural factors such as fiscal deficits, Treasury supply, term premium, overseas demand, and financing for AI capital expenditure

– US Stocks: Broadly higher, led by technologyGrowth stocks are long-duration assets; a cut in short-term rates first alleviates valuation pressure.

– US Dollar: weakened at one point, closing at 99.98; high long-term rates + carry trade + geopolitical risks support resilience

– Gold: Intraday +1.5%, short-term rates ↓ → reduced real rate pressure → lower cost of holding

4. Medium-term risk spillover

1. Macro level: Stagflation risks emerging

– M2 growth rises to nearly 6% by Q2 2026 GDP drops to 1.5%

– Daily crude oil supply gap of 5.5 million barrels

2. Corporate credit level: Acceleration in private credit defaults

- Fitch data for Q2 2026: The US private credit default rate rose to6%(5.7% in Q1)

- Morgan Stanley expects that, driven by the AI-driven disruption of the software industry, direct lending default rates could climb to8%

- The scale of private credit reached$2.1 trillionUSD, with a significant portion of capital coming from semi-liquid instruments

3. Potential transmission channels

If the default rate breaches a critical threshold, redemption pressure will transmit rapidly, triggering a dual effect:

1. Surge in safe-haven demand: Capital flows from risk assets into gold

2. Forced policy pivot: If systemic defaults threaten financial stability, the Fed may cut rates early or even restart QE. The resulting decline in real interest rates will lift the biggest headwind facing gold prices.

[Investment Advisory Information]

Yu Shilin, Licensed Representative, CE Number: ATQ882

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