The U.S. will release personal consumption expenditures (PCE) data at 20:30 Beijing time on Friday. This preferred inflation indicator of the Federal Reserve may bring more positive news, allowing officials to continue to focus on the job market when deciding the pace of interest rate cuts.
Last week, the Fed cut its federal funds rate target by 50 basis points, signaling greater confidence that inflation will return to its 2% target on a sustained basis. The PCE data is widely expected to provide additional support for that stance.
Economists surveyed by FactSet expect the report to show that the overall PCE annual rate was 2.3% in August, which would be a further cooling after falling to 2.5% in July; the overall PCE is expected to grow by 0.1% month-on-month, a slight decrease from 0.2% in July.
Meanwhile, economists forecast the core PCE rate, which excludes food and energy prices, to rise slightly to 2.7% from 2.6% in July.
However, the most closely watched data point on Friday will be the monthly core PCE rate, which economists agree will rise by close to 0.2% month-over-month in August, matching price gains in June and July.
However, at least some economists, including Fed Governor Waller, expect the core PCE monthly rate to be just 0.14% last month, or just 0.1% after rounding. If this turns out to be correct, according to Waller's estimate last week, the core PCE annualized rate over the past four months would be less than 1.8%, below the Fed's 2% target.
“It makes me say, ‘Wow, inflation is coming down a lot faster than I thought,’ ” Waller said. “It makes me feel like a 50 basis point cut is the right thing to do.”
Waller noted that the persistence of core inflation remains narrowly concentrated in the housing sector. But that may eventually change. Researchers at the San Francisco Fed estimate that housing inflation will slip to an annual rate of 2% by the end of this year.
“As the Fed continues to cut rates, the most immediate risk to renewed inflation will be in the housing and rental markets,” wrote Citi economist Veronica Clark. But she noted that both Fed Chairman Jerome Powell and Atlanta Fed President Raphael Bostic have signaled a willingness to overlook still-robust housing inflation in official data “as long as new rental price increases slow.”
With inflation seemingly under control, Fed officials have turned their attention to the other side of their dual mandate — ensuring maximum employment. The unemployment rate has risen steadily and hiring has cooled sharply in recent months.
Data on Thursday showed initial claims for unemployment benefits remained low last week, but economists, analysts and Federal Reserve officials are anxiously awaiting the September jobs report, which will be released on Oct. 4.
However, officials also remain cautious about where inflation is headed. Waller noted that officials were surprised by another acceleration in inflation in the first quarter, so they are now on guard.
Is a major gold correction imminent?
Despite recent dovish comments from Fed policymakers and mixed U.S. economic data, market expectations for a 50 basis point rate cut in November have retreated, with the probability now at 50%, down from about 62% a day ago, according to CME Group's FedWatch tool.
As market bets on a big rate cut by the Federal Reserve at its next meeting fade, this appears to have fueled a new recovery in the dollar, curbing gold's record rally. However, dovish comments from Fed Governor Tim Cook overnight and China's latest stimulus measures continue to limit gold's downside.
The upcoming release of the Federal Reserve’s most popular inflation indicator will determine the next directional move in gold prices and expectations for a sharp rate cut by the Fed in November.
A higher-than-expected core PCE inflation reading could push down expectations for a Fed rate cut in November, kick-starting a recovery in the dollar against major currencies. In this case, gold prices could see a sharp correction down from their all-time highs. Conversely, a surprising downside in core PCE data could increase the odds of another big Fed rate cut, pushing gold prices to new all-time highs at the expense of the dollar.
However, the reaction to the PCE inflation report may be temporary, as month-end and quarter-end outflows may come into play and stir the market. Traders may also take profits in gold ahead of the high-impact U.S. nonfarm payrolls data next week.
In addition, Federal Reserve Board Governor Bowman's speech at 1:15 a.m. the next day may increase potential volatility in gold prices.
Fxstreet analysts pointed out that from a short-term technical perspective, gold prices are still in an extremely overbought area, which indicates that a major correction may be imminent. The 14-day relative strength index (RSI) is currently trading above the 76 level, indicating that bulls need to be cautious. If gold resumes its upward momentum, breaking through the historical high of $2,686 is crucial for further upside to the $2,700 mark and the psychological mark of $2,750.
On the contrary, any correction in gold prices could see it test the September 24 low of $2,623, below which the psychological barrier of $2,600 would act as support. Further down, gold bears could target the September 20 low of $2,585.
Article forwarded from: Jinshi Data
