Source: Jin10 Data

Although the cumulative effect of inflation has had a significant impact on the US economy, from a relative perspective, the situation is gradually improving. The inflation rate is currently approaching the Federal Reserve's 2% target, a trend that may be reflected when the US Department of Commerce releases its inflation data on Thursday.

At 20:30 Beijing time on Thursday, the US will release the September PCE price index. Forecasts indicate that the overall inflation rate will continue to decline, partly due to a decrease in rbob gasoline prices.

Market expectations are for the September PCE price index to increase by 0.2% on a month-on-month basis, and by 2.1% year-on-year. It is expected that the month-on-month growth rate of the core PCE price index will rise from the previous value of 0.1% to 0.3%, while the year-on-year growth rate will slightly slow to 2.6%, the lowest level since February 2021.

Russell Price, Chief Economist of Bank of America, stated, "Overall, the trend is downward, but the Federal Reserve still has a long way to go to achieve its target."

The PCE price index is the Federal Reserve's preferred indicator of price changes. Price expects the overall PCE inflation rate for September to be 2.1%, with a core PCE inflation rate of 2.7%, which is largely in line with market expectations.

Is inflation still sticky?

Most of the components of the PCE report come from the CPI report released earlier this month. The CPI report for September showed mixed inflation pressures, with slight increases in housing, auto insurance, medical care, and airfare prices. However, the report indicated a decrease in prices in the energy category, including gasoline prices. The PCE report may paint another mixed picture, despite the different weights of each category in each index.

The market expects that this PCE report may show that categories such as medical care and financial services will still exhibit a certain degree of stickiness. Overall, it is expected that this will leave room for the Federal Reserve to continue cutting interest rates.

Price attributes the overall difference between PCE and core PCE indicators to the combined effect of lower energy prices and higher medical care prices. He explained, "The rebound in medical care costs in September may be reflected in a slight uptick in core inflation."

What action will the Federal Reserve take next?

In September, the Federal Reserve cut interest rates for the first time since the outbreak of the pandemic. Now, investors are closely watching inflation and the labor market for clues about the Federal Reserve's next steps. Concerns about an overly weak labor market have eased, but analysts say the Fed will focus more on this half of its mandate as inflation pressures have eased.

"We are in a bit of a tricky spot right now," said Matt Rowe, portfolio manager and cross-asset strategy head at Nomura Asset Management, as the easing of price pressures has the Federal Reserve and the markets analyzing what kind of interest rate policy will help the Fed strike a balance between achieving its inflation target and maintaining a healthy labor market. He said, "The Fed's biggest concern is the labor market."

However, many analysts do not believe that Thursday's release will change the Federal Reserve's long-term path.

According to the CME Group's FedWatch Tool, the bond market foresees a probability of over 95% of a 25 basis point rate cut in November. This would bring the federal funds rate target range down to 4.50%-4.75%.

"Although the core PCE is expected to be stronger than in recent months, we believe this is enough for the Federal Reserve to implement a 25 basis points rate cut in November," wrote a Bank of America analyst earlier this month in a report to clients. They expect the core PCE inflation rate in September to increase by 0.23%-0.26%.

Price predicts that the Federal Reserve will maintain interest rates in November and resume rate cuts in December. He said that a quarterly rate cut by the Federal Reserve is a reasonable expectation.

In addition, the US will also release the non-farm payroll report on Friday, with the market expecting October non-farm payrolls to drop sharply from the previous value of 0.254 million to 0.115 million, while the unemployment rate will remain at 4.1%.

Is buying gold now a wise choice?

Amid political tensions in the US and Middle East turmoil, gold continues to attract safe-haven funds and is approaching the $2800 mark. Currently, the further rise in US bond yields is driving a recovery in the US dollar demand, which to some extent is limiting the price of precious metals. Traders are now waiting for the release of the US PCE price index.

FXStreet analysts point out that despite the just-released quarterly inflation data, the PCE data released on Thursday may have only a small impact.

The analyst added that from a technical standpoint, despite being overbought, gold's daily chart remains bullish, with its price continuing to trade above all its moving averages, with the 20-day Simple Moving Average (SMA) currently around $2691.70. The 100 and 200-day moving averages are gaining momentum, well below the shorter moving averages, reflecting continued buying interest. Finally, the technical indicators are in overbought territory, losing some of the upward momentum, but are far from showing signs of exhaustion. Before any relevant downward correction occurs, gold could potentially hit new higher historical highs.

On the 4-hour chart, gold shows a sustained strong upward momentum. The technical indicators recover their gains in the overbought zone after a mild corrective decline, confirming that buyers continue to seize opportunities on pullbacks. Gold may break through $2800 and continue to rise before the US elections.

City Index senior analyst Matt Simpson also stated:

"Whether gold is rising or falling, traders are looking to buy gold, which makes the retracement of gold relatively small, and the consolidation also tense. If the PCE inflation rate increases by 0.2% or lower on a monthly basis, it seems that the trend will continue to rise."

Editor / jayden