Since peaking two years ago, inflationary pressures have significantly eased, but the pace of improvement has slowed in recent months. The PCE index is the Fed's preferred measure of price pressure. The Fed aims to keep the PCE inflation rate around 2% in the long term to maintain a healthy economy.

According to economists' expectations, the PCE price index is expected to rise by 0.20% month-on-month and 2.30% year-on-year in October. The core PCE inflation rate, excluding the volatile food and energy prices, is expected to rise by 0.30% month-on-month and 2.80% year-on-year.

Although economists expect both indicators to rise compared to September, analysts believe price pressures are still improving. Ameriprise Financial's chief economist Russell Price noted that the higher readings in October 'do not undermine long-term trends.'

Notably, due to Daylight Saving Time and the Thanksgiving holiday, this PCE data will be released at 21:30 Beijing time on Wednesday, rather than the usual 20:00 on Thursday.

Base Effect

The base effect may lead to a slight increase in PCE inflation in October. Price explained that the lower inflation numbers in October 2023 mean that this week's data will appear stronger by comparison.

Overall, despite some setbacks this fall and the influence of base effects, economists still expect inflation to continue easing in 2025.

LPL Financial's chief economist Jeffrey Roach stated, 'These could be potential illusions; I don't think this necessarily represents a change in trend.' Roach expects the PCE inflation annual rate to 'look very favorable' by early 2025.

Important Categories

Earlier this month, economists at Bank of America wrote, 'While progress has been made on inflation, it shows signs of stagnating above the Fed's 2% target, and we believe the market should not panic.' They pointed out some specific drivers of price increases in October (such as rising airfare prices) and the economic fundamentals supporting further disinflation.

Many of the data sources used in the PCE report come from the consumer price index (CPI) report published earlier each month. Overall, the October CPI report showed a slight increase in inflation due to rising food, housing, and used car prices.

However, the key point is that these two indices have different weights. Housing and auto prices have a smaller impact on the PCE than on the CPI. Price pointed out that healthcare costs have the highest weight in the PCE index, which have improved in the CPI report, meaning PCE readings may come in below analysts' expectations.

Roach also mentioned two other categories worth watching: airfare prices and financial services and insurance costs, which have been high this year but have now eased.

Will the Fed cut rates in December?

Investors have lowered their expectations for a Federal Reserve rate cut in recent weeks. According to data from the CME FedWatch tool, the market expects about a 45% chance the Fed will keep rates unchanged at the upcoming December meeting. A month ago, this probability was 24%.

Roach expects the Fed to skip a rate cut in December or January next year, followed by up to four cuts in 2025. Analysts at Bank of America, however, anticipate a cut in December but add that 'given the resilience of economic activity and stubborn inflation, the cuts seem likely to be more moderate.'

Gold Technical Analysis

Fxstreet analyst Haresh Menghani stated that technically, gold prices rebounded nicely from the recent 61.8% Fibonacci retracement level on Tuesday, and the subsequent strong performance favors bullish traders. However, the oscillators on the daily chart have not yet confirmed a positive bias, indicating that the upward trend in gold is more likely to encounter strong resistance near the 100-period simple moving average (SMA) on the 4-hour chart, which is around the $2645 region. If this level can be breached, gold prices may further rise to the $2665 region, challenging the resistance at $2677-2678, with the ultimate target being to reclaim the $2700 round number.

On the other hand, the $2624-2622 region may provide some support for gold prices, followed by the $2600 target. If gold prices drop significantly below the latter, it will be seen as a new trigger point for bears, looking towards the $2569-2568 range of the 100-day SMA. Following that is the $2537-2536 region of the monthly low. If gold prices fail to hold above the support levels mentioned, it will be seen as a new trigger point for bears and pave the way for a corrective decline from the historical high of around $2800 reached in October.

Article forwarded from: Jinshi Data