The Federal Reserve has insisted it will not cut interest rates until it gets more good inflation data, and Thursday's consumer price index (CPI) report may give policymakers more confidence and make the prospect of a September rate cut clearer.

The CPI report, due at 8:30 p.m. Beijing time, is expected to show that overall inflation increased by 3.1% year-on-year, slowing from the 3.3% increase in May. This would be the smallest annual increase since January, as another drop in energy prices could put further downward pressure on the overall CPI. On a month-on-month basis, the overall CPI is expected to rise by 0.1%, a slight increase from May.

On the other hand, the core CPI, which excludes volatile food and energy costs, is expected to rise 3.4% year-on-year and 0.2% month-on-month, which would be the smallest consecutive increase in nearly a year. In an era of low inflation, core prices tend to increase by 0.1% or 0.2% month-on-month.

Economists said that while expectations for June CPI "are not as low as the May report indicated, it will still be a good number for the Fed."

“We expect the June CPI report to again bolster confidence in the fight against inflation following an undeniably good inflation report in May,” Bank of America economists Stephen Juneau and Michael Gapen wrote in a note last week.

The main obstacle to fighting inflation

Thursday’s inflation data comes at a critical time for the Federal Reserve’s monetary policy after a slowdown in job market growth and recent testimony from Fed Chairman Jerome Powell kept hopes alive for a rate cut.

Powell largely stuck to his data-dependent message during testimony on Capitol Hill this week, a positive sign given recent encouraging data.

He told a Senate Banking Committee hearing on Tuesday that while there was evidence of cooling inflation, the Fed still needed more good data to be confident that inflation was moving toward the Fed's 2% target.

The high core inflation rate in the United States is mainly due to rising costs of housing and core services such as insurance and health care.

Bank of America's Junod and Gapen noted that prices for non-housing services "unexpectedly declined somewhat in May, largely due to a slight decline in motor vehicle insurance."

But the two economists expect non-housing services prices, which include motor vehicle insurance, to increase in June, suggesting a "bumpy" path to price stability. "Non-housing services inflation should slow over time given cooling in services wage inflation, but this disinflationary trend is unlikely to persist," they warned.

At the same time, however, price increases for rents and owner’s equivalent rent (OER) are expected to cool in the coming months, which “should increase the Fed’s confidence in the inflation outlook,” Bank of America noted.

The Goldman team, led by Jan Hatzius, also believes inflation could still fall further this year, citing "rebalancing in auto, rental and labor markets." But they add that "catch-up inflation" in health care and auto insurance and the continued outperformance of single-family rent growth over multi-family rent growth will offset some of that slowdown.

Goldman Sachs currently expects that by December 2024, the core CPI will grow by 3.2% year-on-year and the core PCE will grow by 2.7% year-on-year, lower than the previous forecasts of 3.5% and 2.8%, respectively.

Will the September interest rate cut be a foregone conclusion?

The Fed wants to see inflation consistently below 3% so it can have the confidence to cut interest rates. But Powell said the Fed will not wait until inflation reaches its 2% target before cutting rates. In addition, recent economic data has also fueled the argument that the Fed should cut rates sooner rather than later.

The Fed's preferred inflation measure, core PCE, showed a year-on-year increase of 2.6% in May, in line with expectations and the slowest annual increase in more than three years. On Friday, data from the Bureau of Labor Statistics showed that the unemployment rate unexpectedly rose to 4.1%, the highest level in nearly three years.

Bank of America said, "If the CPI report is in line with our expectations, we will maintain our expectation that the Fed will start a rate cut cycle in December." Nevertheless, the bank also acknowledged that the core CPI growth rate remaining at 0.2% month-on-month will increase the risk of an early rate cut, especially given signs of weak economic activity.

Investors now expect the Fed to deliver one or two 25 basis point rate cuts this year, down from six expected at the start of the year, according to Bloomberg data. As of Wednesday, the market priced in about a 75% chance that the Fed will start cutting rates at its September meeting, according to CME Group.

Financial blog Zero Hedge believes that today's CPI data will almost certainly be in line with or slightly below expectations, as Nick Timiraos, a reporter known as the "New Fed News Agency," published two September rate cut notices within 24 hours. This means that even if the Fed may not cut interest rates at the July FOMC meeting, it may very clearly hint at a September rate cut.

U.S. stocks may be constrained by the earnings season, and gold is heading for a new record high again

Tony Roth, chief investment officer at Wilmington Trust Co., said stocks could rebound if inflation data comes in lower than expected because some investors haven’t gotten over concerns from earlier this year when inflation briefly picked up.

Bank of America analysts said the potential downside risk to stocks from a hot CPI data outweighs the potential upside risk from a soft data. The bank told its clients that it would be prudent to protect stock exposure on the downside, especially since the second-quarter corporate earnings season will begin on Friday.

As for gold, the short-term technical outlook for gold prices continues to tilt to the upside as the 14-day relative strength index (RSI) is above the 50 level. Bulls need to break above the six-week high of $2,393 to resume the uptrend towards the all-time high of $2,450. Until then, the $2,400 level may be a difficult hurdle for them to overcome.

On the downside, gold prices may first be supported by the psychological level of $2,350. If it falls below this level, it will challenge $2,340. However, if it falls further below the 21-day moving average, it may trigger a new round of decline towards the $2,300 mark.

Article forwarded from: Jinshi Data