CPI Provides Breathing Room for the Market, but High Deficits, Yen, and Energy Risks Keep Long-Term Funding Costs Elevated

On August 13, the U.S. July CPI increased by 0.1% month-on-month and 3.4% year-on-year, while the core CPI rose by 2.5% year-on-year, indicating a moderate overall inflation performance. The decline in energy prices also offset some of the upward pressure on housing costs. Following the release of the data, market pricing for a Federal Reserve rate hike in September dropped from about 50% to around 40%, easing short-term policy pressure.

However, this CPI report is not sufficient to directly translate into expectations for easing. The U.S. fiscal deficit continues to widen, with a cumulative deficit of nearly $1.8 trillion over the first ten months, and the national debt approaching $40 trillion, with interest expenses also on the rise. Against this backdrop, the U.S. needs to continue issuing a large amount of government bonds, and the yield on the 10-year U.S. Treasury bond has risen to its highest level since 2007, while the 30-year yield is nearing 5.25%, reflecting that long-term funding costs are driven by fiscal supply, sticky inflation, and market risk premiums.

Therefore, the key issue in the U.S. interest rate market is no longer just whether the Federal Reserve will raise rates in September, but whether long-term yields will continue to rise due to fiscal deficits and government bond supply, even if the Fed keeps rates unchanged. This also means that financial conditions may not necessarily improve in tandem with a decline in policy rates; for high-valuation, high-leverage assets, long-term yields remain a significant source of pressure.

In Asia, the yen is once again approaching the 160 mark, with Japan's July PPI increasing by 7.2% year-on-year, raising expectations for a rate hike by the Bank of Japan in September. If Japan's monetary policy further normalizes, coupled with a narrowing of the Japan-U.S. interest rate differential, global capital allocation and yen arbitrage trading may be affected.

Gold has benefited from a decrease in the tail risk of rate hikes, a weaker dollar, and renewed support from fiscal uncertainty. However, it is currently more aligned with a tactical rebound driven by interest rate expectations rather than a simple rate cut trade. Future events such as the Jackson Hole meeting, along with inflation and employment data, will determine whether the gold market can sustain its momentum.

On the other hand, the Russia-Ukraine conflict is reintroducing energy and food supply risks to the global market. Russia and Ukraine have recently continued to attack Black Sea ports, energy facilities, and commercial ships, coinciding with Ukraine's peak grain export season. If Black Sea shipping faces further disruptions, it could drive up wheat and related food prices, complicating the already existing energy inflation risks.

Overall, the July CPI has reduced the immediate pressure for the Federal Reserve to raise rates, but it has not eliminated the constraints on funding costs created by the U.S.'s high deficits, high debt, and high long-term yields. Moving forward, the core of global asset pricing will gradually focus on the tug-of-war between "whether inflation continues to cool" and "whether fiscal supply pushes up long-term rates." For high-volatility assets like Bitcoin, short-term attention should still be on dollar liquidity and long-term U.S. Treasury yields, rather than solely observing the Fed's policy rate itself.

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