The upcoming release of the July Consumer Price Index (CPI) report in the United States at 20:30 Beijing time on Wednesday will be a key moment in the financial market, and its performance is likely to have an impact on the market's expectations of a rate cut by the Federal Reserve in September. Previously, Fed Chairman Powell emphasized that favorable inflation data is crucial for a rate cut in September.

According to the median expectations of economists, the overall CPI may increase by 3% year-on-year in July, which is the same as last month; the month-on-month growth rate is expected to rebound from -0.1% to 0.2%. At the same time, the year-on-year growth rate of core CPI excluding food and energy in July is expected to slow down from 3.3% last month to 3.2%, and the month-on-month rate will increase slightly from 0.1% to 0.2%. If the data meets expectations, the core CPI will record the smallest quarterly increase since the beginning of 2021.

Anna Wong, chief economist of Bloomberg in the United States, said: 'We expect that the CPI in July will weaken, driven by the slowdown in long-term expected housing rents, the decline in used car prices, and the push of discounts on discretionary service categories resulting from consumer-controlled expenditures.'

The key parts to focus on in the report

Rent

By the end of 2023, excluding housing, core inflation has basically returned to pre-COVID-19 levels. However, CPI data shows that rapid growth in rents has continued for most of the first half of 2024. However, this trend sharply reversed in June, with rent recording the smallest monthly increase since mid-2021.

Economists expect this slowdown to continue over the next few months, which should help control overall CPI. Rents are the largest category in this index, so they have an important influence in determining the broader inflation trend.

Wells Fargo economists Sarah House and Aubrey George said in an August 7 data preview: 'The decelerating trend in primary rents seemed to be sustainable in June based on the BLS's new rent index for new tenants and private sector vacancy rates. We expect this category to rise 0.3% in July and maintain between 0.25% and 0.30% until the end of the year.'

Used cars

Among the commodity components of the CPI index, analysts are particularly concerned about used cars. Given its weight in the index, the decline in July may help to continue the downward trend of core commodity prices, with this category falling for 12 of the past 13 months.

Although a widely tracked wholesale price index for used cars from Manheim rose in July, the CPI index often has some lag, and July was the first month of growth since January.

Goldman Sachs economists Ronnie Walker and Jessica Rindels said in an August 12 data preview:'Used car auction prices have fallen 26% from their peak, while used car prices in the CPI have fallen 18%, indicating that there is further room for the CPI to fall.'

In addition, they expect new car prices to moderate as dealer promotional incentives recover after the dealer software system is restored to normal at the end of June.

Airfare prices.

Airline ticket prices were an important factor in the decline in core CPI in June, with a 5% drop being the largest decline in a year. This helped core service costs excluding rent fall for the first consecutive two months since mid-2021.

Citigroup economists Veronica Clark and Andrew Hollenhorst said the July reading was a mixed bag, with reasons for both rises and falls.

They wrote in their report: 'We were surprised by the softness of airline ticket prices last year, and after seasonal adjustments, airline ticket prices were even lower than pre-pandemic levels. We have always expected airline ticket prices to recover somewhat this year, as the CPI statistics last summer may have reflected flights with lower summer demand. However, due to generally weaker tourism demand than last year, airline ticket prices may continue to soften.'

Has the focus of the Federal Reserve changed?

Dom Wilson, senior market consultant at Goldman Sachs, believes the focus of the Fed has shifted from inflation to growth, reflecting both the improvement in the inflation situation and the sharp increase in concerns about growth.

He said that the impact of CPI on the Fed is still important (as market reacted positively to PPI data improvement), but the threshold for triggering a significant market correction is now higher than it was in the past, since the market may correctly judge that the timing and magnitude of a rate cut will depend more on employment and economic growth.

Goldman Sachs' CPI forecast (0.16% month-on-month increase in core CPI in the United States in July) should be a little reassuring. But Wilson noted that since the primary concerns now are about growth risks, the market may be more sensitive to retail sales data and initial jobless claims later this week, and lower-than-expected retail sales data may be a bigger obstacle to the current momentum. Nonetheless, compared to Goldman Sachs' US economic team's view of a 25% probability of a recession, he believes that the market may still be pricing in too high a probability of a recession at the tail end.

Will gold bulls hit the 2500 level?

After the slower-than-expected increase in US July PPI on Tuesday, traders regained confidence and seemed to be ready for significant gains in their own CPI report on Wednesday.

Deutsche Bank's chief US economist, Matthew Luzzetti, said after the release of the PPI report: "The market is tilting very dovish," and "inflation data is expected to be weak, allowing the Fed to start cutting rates."

Gold bulls are also looking forward to a relatively mild US CPI report, as the previous PPI data eased the downward correction of gold prices, as gold prices near historical highs usually face profit-taking before CPI data is released.

A CPI report that is milder than expected may confirm the bet on an aggressive and significant interest rate cut by the Fed, strengthening the trend of a weaker dollar. Conversely, gold prices may hit new historical highs. In addition, gold will continue to be supported by the geopolitical tension in the Middle East, as the market prepares for Iran's imminent attack on Israel. Fed policymakers' speeches will also affect the price of gold.

According to the FedWatch tool of CME Group, there is a 54% probability that the Fed will cut rates by 50 basis points in September.

According to FXstreet analysts, based on the daily chart, gold is challenging the upper boundary of the symmetrical triangle, which is currently at $2471. Gold bulls expect US CPI data to ensure that the daily closing price of gold is above this level, which may trigger a new round of rally to $2500. Before that, it is necessary to surpass the historical high of $2484. The Relative Strength Index (RSI) on the 14th declined, but still remains above 50, implying that any pullback in gold prices may continue to be bought.

On the other hand, an unexpected upward trend in US CPI data may rekindle interest in selling, pulling gold back to the 21-day moving average support of $2420. Prior to this, the high point on August 9 at $2437 may provide some support. If the selling momentum intensifies and the 21-day moving average support is broken, the next relevant support level will appear at $2380, where the lower boundary of the symmetrical triangle and the 50-day moving average converge.

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