The US August CPI rose 3.4% year-on-year, and the core CPI rose 2.4% year-on-year, largely in line with market expectations. However, why did the expectation of an interest rate hike jump from 70% to 90%? And strangely, why did gold and tech stocks surge in the face of an impending Fed rate hike? A closer look reveals that the housing CPI component, which contributes approximately 43% to the growth rate, declined, while the core CPI remained the same as the previous month. Meanwhile, real weekly wages rose from 0 to 0.1%, showing signs of upward movement in wages. Combined with the core CPI's better-than-expected month-on-month increase, this directly reflects that consumer prices are still rising. After the data release, the market pushed the probability of a Fed rate hike in September to 90%. However, a seemingly contradictory market trend emerged: despite the significant increase in rate hike expectations, gold prices did not fall, and tech stocks strengthened. The core drivers were the mispricing of real interest rates and the exhaustion of negative news.

CPI Structure Breakdown: Housing prices fell first, core CPI strengthened month-on-month, and wages showed signs of rising.

August's CPI year-on-year reading fell within the expected range, seemingly indicating that inflation has temporarily stabilized. However, the breakdown of components cannot be simply interpreted as a cooling of inflation. The housing component, contributing approximately 43% to the CPI, saw a year-on-year growth of 3.0%, lower than the previous period's 3.2%. However, the core CPI year-on-year growth did not decline, and core prices excluding energy and food strengthened month-on-month, indicating that the prices of goods and services purchased by residents are still rising, and endogenous inflationary pressures have not subsided. On the labor side, real weekly wage growth rose from 0 to 0.1%, showing an upward trend. Although this is only a marginal change in a single month, coupled with the strengthening of the core CPI month-on-month, the market is beginning to worry that continued wage increases will further transmit to the service sector, solidifying inflationary resilience. The energy CPI rose 16.3% year-on-year, continuing the impact of rising oil prices due to the Middle East conflict, further supporting the overall CPI. Based on this data, the market has raised the probability of a Fed rate hike in September to 90%, with traders pricing in a high probability of a rate hike at this FOMC meeting.

Analysis of Unusual Market Trends: With interest rate hike expectations at their peak, why isn't gold falling while tech stocks are rising?

In conventional logic, rising interest rate hike expectations would push up nominal interest rates, suppressing long-duration assets, and typically causing gold prices and highly valued tech stocks to weaken. However, this time, the opposite occurred. One reason is that interest rate hike expectations had already been priced in. The data release, occurring on the Thursday before the CPI announcement, meant the market had already priced in inflation resilience. US 2-10 year Treasury yields rose collectively, while gold prices and tech stocks fell in tandem. The market had already priced in most of the negative impact of this rate hike. By the time the CPI was officially released, the probability of a rate hike had risen to 90%, representing the realization of the previous trading logic and a typical case of "sell the news." Simultaneously, as mentioned above, CPI data boosted market expectations for long-term inflation. Because the negative impact had been priced in, the nominal interest rate, represented by US Treasury yields, was anchored within a fixed range, and the trend of the real interest rate (nominal interest rate - inflation expectations) declined rapidly due to the rise in inflation expectations. Gold is a non-interest-bearing, long-duration asset, and tech stock valuations are highly dependent on the discounted value of forward cash flows; both are highly sensitive to real interest rates. When real interest rates decline, the opportunity cost of holding gold decreases, and the present value of the future cash flows of technology stocks increases, leading to a simultaneous rebound in both gold and technology stocks. Simply put, while saving money may yield higher interest rates, future purchasing power is lost faster, making money less valuable. Therefore, high-growth assets or hard currencies with a fixed total amount and no interest rate increases become more valuable.

A deeper logic: In the context of an election cycle, this rate hike has actually strengthened market confidence in the Federal Reserve's ability to control inflation.

With the US election approaching, the market has long worried about political interference in the Federal Reserve and questions about the central bank's independence. Against this backdrop, if the Fed decisively raises interest rates when inflation shows resilience, it demonstrates to the market that monetary policy prioritizes price stability and is not dictated by the election cycle, thus boosting long-term market confidence that US inflation is controllable. Meanwhile, strong employment data and continued hiring by companies indicate the resilience of corporate earnings fundamentals, enabling them to withstand a higher interest rate environment. This reduces the tail risk of a deep recession triggered by high interest rates, and the risk premium that the market needs to compensate for with nominal interest rates subsequently declines. When nominal interest rates are essentially fixed by the market, and inflation expectations continue to rise, the opportunity cost of long-duration assets like gold and technology declines rapidly, ultimately leading to the unusual synchronized rise in asset prices after this data release.

Summary and Technical Analysis:

The market is currently pricing in a 90% probability of a September rate hike, with the baseline scenario being a single rate hike by the Federal Reserve. The market focus is no longer on whether or not a rate hike will occur, but rather on whether further tightening is needed after the hike and how long high interest rates will be maintained. As previously mentioned, regardless of CPI or rate hikes, gold is likely to present a buying opportunity; the logic remains unchanged. Furthermore, as discussed in the previous article, US Treasuries will not be subject to indefinite selling. Once the US begins to tell a growth story and demonstrates its determination to combat inflation and its central bank independence, US Treasuries will remain a very essential asset for many countries and institutions. Moreover, government intervention exists, and a policy bottom has already been reached. Regarding the extent of further rate hikes, the ongoing Iran war will not generate oil revenue through rate hikes, nor will it solve imported inflation. Instead, restoring the Fed's independence will have a greater impact on interest rates and is more likely to bring cheaper rates to the market. Additionally, the US needs to develop its AI technology and requires support for the US stock market before the midterm elections. How much room for further rate hikes is there? Technically, a double bottom pattern suggests gold prices are attempting to return to a higher price range for consolidation, currently facing resistance at the bottom of this range. (Spot gold daily chart, source: EasyTrade) At 21:37 Beijing time, spot gold is currently trading at $4392 per ounce.