On Friday, the latest reading of the Fed's preferred inflation gauge will be released. According to market consensus, the December Personal Consumption Expenditures (PCE) report will show that core inflation continues to slow, although rising gasoline prices are putting upward pressure on overall PCE.
As the latest PCE report is released, the Fed is entering a wait-and-see mode, with the market generally expecting the Fed to keep rates stable in the coming months.
While price pressures in the U.S. have steadily eased from peaks two years ago, investors are now grappling with a series of unresolved issues. These issues involve the impact of Trump's policies and the possibility that the Fed will keep rates elevated for a longer period than initially expected.
According to widespread estimates from FactSet, economists expect overall PCE in December to rise by 0.3% month-on-month and by 2.6% year-on-year, both higher than previous values. They anticipate that core PCE inflation (excluding volatile food and energy prices) will accelerate by 0.2% month-on-month, while year-on-year growth will remain at 2.8%.
Despite an expected increase in overall PCE for December, Ameriprise Financial Chief Economist Russell Price stated, 'We continue to make progress on inflation.'
He expects a 0.3% month-on-month increase in overall PCE for December and a 0.2% month-on-month increase in core PCE, consistent with general market estimates. 'We still expect these two data points to make further progress in the coming months and potentially approach (but not fully reach) the Fed's target of about 2% by mid-year,' he said.
Many raw data points in the PCE report were released in advance, such as the Consumer Price Index (CPI). This means economists have a good grasp of Friday's PCE data.
The December CPI report showed that overall inflation slightly increased due to rising energy prices, but core inflation continues to slow. The market reacted positively to the report, alleviating investors' concerns about a renewed surge in price pressures.
Price expects the market will not react the same way on Friday, even though the data may show similar trends. 'There are already numbers indicating that inflation is easing, and PCE should show similar information,' he said.
Economists generally expect core PCE to continue declining in the coming months, although sticky service prices still pose upward pressure on the index. Morningstar Senior U.S. Economist Preston Caldwell expects, 'If we do not see inflation skyrocketing again, core PCE year-on-year growth in March will drop to a low of 2.2%, provided inflation does not surge again, as we saw in the first quarter of 2024.'
When will the Fed cut rates?
The Fed kept rates steady at its first meeting of the year earlier this week, which was not unexpected for the market. The policy-making committee noted in a statement, 'Inflation remains somewhat elevated.' With the economy still growing and no signs of weakness in the labor market, officials have room to wait for more evidence of price pressure cooling before taking another rate-cutting action.
'Maintaining a pause is a very rational and reasonable viewpoint,' Price said, citing strong consumer spending, employment, and economic growth data. He expects the Fed to cut rates by 25 basis points at the June meeting.
Some strategists even suggested that after a full percentage point cut last fall, the Fed has ended its rate-cutting cycle. 'The labor market is stabilizing, and inflation is slightly above target,' wrote economists at Bank of America in a report to clients earlier this month.
Following this week's Fed meeting, Nomura now expects the Fed to remain on hold in 2025, down from its previous forecast of one rate cut. Meanwhile, Goldman Sachs reiterated that they still expect the Fed to cut rates twice, but this is a reduction from three cuts anticipated earlier this year. Earlier this month, Barclays also lowered its expectations, predicting that the Fed will only cut rates once this year.
Gold bulls are in high spirits
On Thursday, after U.S. economic data showed slower-than-expected economic growth, spot gold surged to a record high, nearing the $2800 mark. Additionally, Trump's reaffirmation of a 25% tariff on imports from Mexico and Canada also boosted demand for gold as a safe haven. Investors are now turning to the PCE data for further clues on the trajectory of interest rates.
IG Market Strategist Yeap Jun Rong stated, 'Repeated threats of tariffs have fueled safe-haven flows into gold... Any unexpected downside in inflation data could indicate greater policy flexibility for the Fed, potentially bringing forward rate cut expectations and providing further support for gold.'
KCM Trade Chief Market Analyst Tim Waterer stated that if the threat of tariffs shifts from a bargaining concept to an economic reality, gold may rise further.
As the upward trend in gold has resumed, the path to $2800 for gold is now very clear. Fxstreet analysts state that bulls may next challenge key psychological levels of $2850, $2900, and $3000. On the other hand, bears must pull the gold price below $2750 to have a chance to test $2700; a break below this level would open up more downward space, with the next key support at $2663, the convergence point of the 50-day and 100-day moving averages.
Article reposted from: Jin Shi Data