Source: Jin10 Data

On Friday at 20:30 Beijing time, the US Department of Commerce will release the PCE price index, which is the most favored inflation data by the Fed, and there may be some quite good inflation news by then. According to Dow Jones' prediction, the overall PCE month-on-month growth rate is expected to remain the same as last month. If this expectation comes true, it will be the first time since November 2023. But more importantly, after removing volatile food and energy prices, the core PCE year-on-year growth rate, which is more closely monitored by Fed policy makers, may hit a new low since March 2021, when the core PCE price index first exceeded the Fed's current dream target of 2%. Market expectations are for core PCE month-on-month growth rate to rise by 0.1%, slowing from the previous value of 0.2%. Both the overall PCE and core PCE year-on-year growth rates are expected to slow to 2.6%.

Dow Jones predicts that the overall PCE month-on-month growth rate is expected to remain the same as last month. If this expectation comes true, it will be the first time since November 2023.

But more importantly, after removing volatile food and energy prices, the core PCE year-on-year growth rate, which is more closely monitored by Fed policy makers, may hit a new low since March 2021, when the core PCE price index first exceeded the Fed's current dream target of 2%. Market expectations are for core PCE month-on-month growth rate to rise by 0.1%, slowing from the previous value of 0.2%. Both the overall PCE and core PCE year-on-year growth rates are expected to slow to 2.6%.

In addition, the US Department of Commerce will also publish personal income and consumer spending data, which are expected to increase by 0.4% and 0.3% month-on-month, respectively.

If the market's prediction for core PCE comes true, it will be some kind of milestone. BMO Capital Markets' chief US economist Scott Anderson also predicted that the month-on-month PCE growth rate in May will remain unchanged, which is good news. He said,

"This suggests that any slowdown in GDP growth and consumer spending could be quite gradual. We are still on track for a soft landing, and I think Friday's data will open the door for a rate cut by the Fed in September."

Will multiple factors bring down PCE data?

Although the Fed targets PCE inflation, the CPI index is often more closely watched because it is released before PCE data.

It is worth noting that the calculation methods of these two indices are different and PCE data is often lower than CPI data. Preston Caldwell, chief US economist at Morningstar, said, "As long as the housing inflation rate remains high, we are likely to see core PCE remain below core CPI, as the latter has a higher weight on housing."

Bill Adams, chief economist at Comerica, believes that on an annualized basis, PCE inflation in May "may slow to its lowest level since early 2021, which would be a real step toward the Fed's 2% target."

He added that overall, "we expect inflation to improve this year, as inflation rates have been in a lateral fluctuation state since earlier this year."

Adams pointed out that the decline in gasoline prices in May is one of the reasons for the improvement in inflation rates, which is unusual since gasoline prices often rise in the summer. "This year we didn't see the typical seasonal rise in energy prices." He also pointed out that healthcare price increases are more moderate.

In addition, the continued weakness in commodity prices is also worth noting. Anderson of BMO Capital Markets said, "Consumers are cutting back on discretionary spending, which has prompted some retailers to significantly discount. The strength of the dollar and the decrease in import prices also support these discounts."

Meanwhile, Bank of America analysts point out that portfolio management fees and airfare prices are falling, factors that are bringing down overall and core PCE data.

Beth Ann Bovino, chief economist at Bank of America, said, "Our forecast is consistent, that the core PCE will be weak. This is good news for the Fed. It's also good for people's wallets, although I don't know if people feel it."

Will the Fed finalize its rate cut decision in September?

In fact, though the inflation rate has fallen sharply from its mid-2022 peak since the Fed began raising interest rates in March 2022, since March 2021, core PCE has risen 14%, and the sharp rise in this inflation and its harmful effects are the reasons why Fed officials are not yet ready to declare victory. Fed Director Cook said earlier this week, "Sustainably returning inflation to the 2% target is a continuous process, not a done deal."

Cook and her colleagues have been cautious about the timing and speed of rate cuts, although most believe that sometime this year, rate cuts may be possible as long as the data remains consistent. At a meeting earlier this month, policymakers only expected to cut rates once. Fed Chairman Powell also stressed that rates would not be cut unless officials had more confidence in continuing declines in inflation to the target level.

The current trend in the futures market suggests that the Fed is likely to cut rates by 25 basis points for the first time in September and lower rates again by the end of this year.

On Thursday, Atlanta Fed President Bostic stuck to the expectations on the dot plot and expected a possible rate cut in the fourth quarter and a 25 basis point cut every other quarter next year.

Bank of America expects the Fed to cut rates in December. Bank of America analysts wrote, 'We believe the Fed needs to see several months of good inflation data to have enough confidence to implement a rate cut.'

Anderson believes that there is little likelihood that the Fed will cut rates in its July meeting unless there is an 'unexpected large decline in spending or inflation.'

Bovino said, 'We do expect the real economy to soften, not fall off a cliff, just soften, signaling that later inflation will also soften. This gives us reason to expect the Fed may cut rates for the first time in September,' she added,

'Now we all know this depends on the data, the Fed is still watching, but can they wait? Can they do it all this year? I can't rule out that possibility. But it looks like these numbers might provide reasons for the Fed to cut rates twice this year.'

Is gold short-term bearish? But downside limited.

For gold, the commodity analyst at TD Securities stated that although economic data was mixed on Thursday, precious metals remained in a leading position. For tonight's PCE data, 'traders will continue to focus on this data, especially as it is an important catalyst for macro traders who have so far been willing to maintain a bearish posture on gold in the upcoming Fed easing cycle.'

TD Securities expects core PCE month-on-month growth to record the weakest growth since 0.13% this year. Further signs of easing inflation could begin to bring more certainty to the Fed's rate-cutting path and eventually allow macro markets to return to the market with confidence.'

TD Securities believes that if PCE data is poor, there is limited downside for gold. They pointed out that the 'safety margin' for commodity trading advisors (CTAs) is only slightly higher than $2,208 per ounce, while physical demand from central banks around the world and demand for Asian precious metals continue to support the gold market.

On the technical side, FXStreet analysts continue to hold a short-term bearish view on gold, as the 14-day relative strength index (RSI) is still below 50. In addition, the 21-day simple moving average and 50-day simple moving average formed a dead cross last week, which further enhances the potential for bearishness. Analysts believe that any rebound in gold prices is still a good selling opportunity.

Analysts added that if the shorts increase their efforts, the psychological barrier of $2,300 will be tested again, and if not held here, the next support may need to look to the end of the month at $2,287.

On the other hand, if gold wants to resume its upward trend, it must close above the 21-day simple moving average of $2,328 on the daily chart. If it can rise further, the next resistance will be the 50-day simple moving average of $2,338, followed by the near two-week high of $2,366.

Editor / jayden