Source: Golden Ten Data
If tonight's PCE numbers are mixed, or cause the market to think that the Fed's anti-inflation task is not progressing enough, and expectations of interest rate cuts are “cold,” can gold maintain this critical level?
At 20:30 Beijing time on Friday, the US will release PCE data for March. Analysts expect the data to be mixed, which may further strengthen the Fed's determination to stay on hold.
According to FactSet data, analysts expect the US PCE growth rate to rise slightly to 2.6% in March from 2.5% in February. However, they also forecast that PCE growth will fall from 0.33% to 0.30% month-on-month in March.
Economists forecast that after excluding volatile food and energy costs, the US core PCE growth rate in March was 2.7% year-on-year, a slight decrease from 2.8% of the previous value. However, economists expect the core PCE data to rise from 0.26% to 0.30% month-on-month.
Foreign media said that consumer price index (CPI) reports usually overshadow PCE reports, but the latter is the Federal Reserve's preferred inflation indicator. The PCE index is receiving more attention as CPI data shows that the trend of slowing US inflation comes to a standstill, and the confidence of Federal Reserve officials that inflation continues to fall to the 2% target weakens.
Anti-inflation progress has stalled
Kevin Cummins, an economist at NatWest Markets, wrote that the US core PCE “estimated the month-on-month growth rate in March was 0.256%. If the upcoming data is in line with the forecast, it will reduce the year-on-year growth rate of core PCE to 2.7% from 2.8% in February and 2.9% in January... In recent appearances, Federal Reserve Chairman Powell and Vice Chairman Jefferson both mentioned the Fed's estimate of 2.8% year-on-year growth for core PCE in March.”
Cummins went on to say, “Whether the core PCE rate in March was 2.8% or 2.7%, it will be viewed by the market as insufficient progress in the Federal Reserve's anti-inflation task. If our predicted values are accurate, they will push the 3-month annualized growth rate of the core PCE from 3.5% in February to 3.9% in March, while the 6-month annualized growth rate will drop slightly from 2.9% to 2.7%, both of which are still slightly above the Federal Reserve's target.”
Furthermore, Cummins pointed out that the US core CPI growth rate in March was 0.4% month-on-month, “mainly driven by significant growth in auto insurance and medical service components, both of which are not included in the core PCE.” Meanwhile, core PCE data comes from components of the Producer Price Index (PPI), such as airline tickets and financial services. “Last month (PPI data) probably contributed quite positively. As a result, we expect core services PCE (excluding housing) to grow 0.3% month-on-month. PCE for core services is a key indicator that Powell often cites, and it will help inflation return to 2.0%.”
Moderate core PCE inflation
Morningstar's chief US economist Preston Caldwell believes that the US PCE report for March will be mixed. “The core PCE in March will be far below the core CPI, and its 3-month annualized growth rate will still accelerate to 3.8%, higher than the previous value of 1.6%.” He said, “However, the biggest factors causing core PCE inflation to accelerate (durable goods, housing, financial services) should slow down in the next few months. A slowdown in economic growth over the next year will provide another negative impetus to inflation.”
The US core CPI has declined significantly since its peak in September 2022, but its rate of decline is also slowing down. Core PCE also peaked in September 2022, at an annual rate of 5.5%. By the end of 2022, the annual rate of core PCE had dropped to 4.8%, and at the end of 2023, it had dropped to 2.9%.
“Core inflation continues to decline. According to our estimates, the core PCE index was 2.7% per annum in March, down from 2.9% at the end of 2023.” Caldwell explained, “The core CPI has a high annual rate of 3.8%. The gap with the core PCE index is mainly driven by the former's high weight on housing, and inflation is raging there...”
According to Caldwell, durable goods inflation is a key factor supporting the high growth of core PCE: “As supply chain conditions continue to improve, we expect durable goods to re-enter the deflation zone. Housing inflation remains stubbornly high, but leading indicators still strongly suggest that normalization of housing inflation is imminent.”
Another part of the pressure on core PCE inflation is financial services. Caldwell said, “This is largely driven by a sharp rise in US stocks, so if US stocks continue to fall, this effect should disappear over the next few months.”
Implications for the Federal Reserve
Weakening anti-inflationary momentum may mean investors will have to wait longer to cut interest rates. Last week, Powell mentioned the “lack of further progress” in fighting inflation, which may indicate that the Federal Reserve is cautious about current interest rate levels.
Bond investors are in agreement with this. According to CME's US Federal Reserve's observation tool, the probability that the Fed will cut interest rates in May is only 4%, and it wasn't until July that it surpassed 50% for the first time. Analysts at J.P. Morgan Chase said that Powell's speech last week indicated that “compared to what he thought a few months ago, he may have postponed expectations for the first fall of the Federal Reserve.”
According to the Bank of America Global Research Report released last Friday, almost all US Federal Reserve officials who spoke recently confirmed that the Federal Reserve is not ready to cut interest rates. According to the report, the Bank of America expects “the Federal Reserve to cut interest rates at a quarterly pace starting in December.” Analysts also said that the “stickiness” of inflation means that the Fed will not only cut interest rates later than previously anticipated, but also cut interest rates less.
The “turning point” of gold
Fxstreet analyst Haresh Menghani said that the downside of gold prices is still limited because dollar bulls may be more willing to wait for more clues about the Fed's interest rate cut path before making new bets. As a result, the focus remains on US PCE data. PCE data will play a key role in influencing the Fed's future policy decisions, which in turn will influence dollar demand and determine the trend of gold.
From a technical perspective, spot gold has been struggling to break through the 100-day simple moving average (SMA) on the daily chart. The resistance is currently fixed near the $2,345 area. With mixed indicators on the daily chart, 2345 should be viewed as a key turning point in the gold trend. If it continues to break through this resistance, the bulls will see it as a new growth driver, pushing the price of gold to near the next important resistance level of $2371-2372. The subsequent rise may extend further to the $2,400 integer mark and reach the historical peak of $2431-2432.
On the other hand, bears may wait for further sell-offs and effective breakdowns below the 2300 mark before placing short orders. Subsequently, the price of gold may pull back further, falling towards the middle support level of 2260-2255, and may eventually fall to the 2225 area and the 2200-2190 area representing the 50-day simple moving average (SMA).
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