Source: Golden Ten Data

At 20:30 Beijing time on Friday, the US will announce the PCE price index for February. For traders who are anxious to figure out whether the Federal Reserve will cut interest rates three times this year and whether the first drop will be in June, tonight's report is likely to confirm that the US is not off to a good start in terms of inflation.

Numerous economic data for January and February show that the US economy is quite elastic, the labor market is still hot, and inflation is still higher than expected. At last week's interest rate meeting, the Federal Reserve took a wait-and-see attitude on cutting interest rates this year, and assessed whether progress in reducing inflation to the 2% annual target had stalled.

Economists expect the index to once again show that price pressure remains high. According to FactSet data, economists' general expectation for overall PCE data is that after rising 0.3% in January, it will rise 0.4% in February; the year-on-year growth rate will reach 2.5%, up from 2.4% in January.

In terms of core PCE, the market expects the annual rate of core PCE to record 2.8%, the same as in January, and the monthly rate may slow to 0.3% from 0.4% in January. Federal Reserve Chairman Powell once pointed out that this is not “very high.”

On the other hand, American consumers are increasingly convinced that inflation will continue to fall. According to the University of Michigan's latest survey released on Thursday, consumers expect the inflation rate to fall to 2.9% next year, lower than the 3% forecast in February. The forecast for long-term inflation is 2.8%, down from 2.9% a month earlier. Consumer Research Director Joanne Hsu said:

“Consumers are showing confidence that inflation will continue to slow.”

The risk of inflation may be biased towards the upside! Is the Federal Reserve “asking for trouble”?

The CPI data released earlier injected some anxiety into Wall Street, forcing some investors to lower their expectations for when the Fed will cut interest rates for the first time. This is why tonight's PCE data will be more important than usual. This may “confirm” whether the Fed will cut interest rates three times this year and cut interest rates for the first time in June.

Federal Reserve officials “stand still” for the fifth time in a row last week. Meanwhile, the bitmap shows that policymakers expect to cut interest rates by 75 basis points by the end of 2024, that is, cut interest rates by 25 basis points three times. The market is beginning to think that cutting interest rates in June is almost a “foregone conclusion.”

Although Powell has mentioned that the stickiness of recent inflation data is not a reason for the Federal Reserve to change plans, higher-than-expected core PCE combined with strong revenue and expenditure data will raise concerns that inflation will accelerate in the coming months.

The US core CPI inflation rate fell from 3.9% to 3.8% in February, but it was higher than the forecast of 3.7%. Furthermore, the overall PPI rose 0.6% in February, while the core PPI rose 0.3%. These data may indicate to some extent that the core PCE was also higher than expected.

At a press conference after the FOMC meeting on March 20, Powell said that January's higher-than-expected inflation data may be partly due to seasonal adjustments at the beginning of the year.

“Despite this, we don't want to completely ignore it,” Powell said. “We currently expect core PCE to be below 0.3% in February, which isn't very hot. So... I'm considering these two things together, and I don't think they really change the overall situation, that is, inflation will gradually fall to 2% on a tortuous path.”

Regarding the US Federal Reserve, which adheres to the expectation of cutting interest rates three times during the year, Quant Insight, which manages total assets of more than 7 trillion US dollars, raised the question of whether the Fed is making policy mistakes and “forced itself into a corner” by adhering to the forecast of cutting interest rates three times in 2024 by 25 basis points each time.

In a report this week, Quant Insight asked, “Facing strong GDP growth, a tight labor market... the PMI index is above 50, rising energy and metals prices, and three upcoming interest rate cuts, has the anti-inflation process stopped now?”

Furthermore, in the short term, some domestic factors in the US are likely to continue to increase inflationary pressure. For example, gasoline prices are rising, as is usually the case in summer. The prospect that the US national average gasoline price may reach 4 US dollars per gallon is still open to discussion. Meanwhile, analysts are also evaluating whether the Baltimore bridge collapse this week will exacerbate supply chain disruptions.

Mark Heppenstall, chief investment officer at Penn Mutual Asset Management (Penn Mutual Asset Management) in Horsham, Pennsylvania, said:

“I really think the Federal Reserve is causing trouble for itself by allowing the financial environment to be so relaxed.”

It is worth noting that at 23:30 Powell will deliver a speech at the San Francisco Federal Reserve Bank event on the topic of “macroeconomics and monetary policy.” If PCE inflation exceeds market expectations, Powell may change his opinion and lean more towards the hawkish camp.

I'm afraid PCE will have little impact on the market? Gold may still have room to rise even after reaching a new high!

Despite today's two major events, one problem is — the US market was closed on Friday due to the Good Friday holiday, and investors' views on PCE data may not be more clear until Monday. In response, Mike Cornacchioli, senior vice president of investment strategy at Citizens Private Wealth Management, believes that he expects the financial market's reaction to be moderate because investors may pay more attention to future events affecting the market rather than historical events.

“I think the risk of this report is downside,” he said on Wednesday. “If the PCE data is higher than expected and really challenges Powell's statement at the press conference, the Fed's interest rate cut window may close.”

Regarding gold, Ole Hansen, head of commodity strategy at Saxo Bank, believes that in the past few weeks, the risk is that weak prices have forced bulls to continue to clear positions continuously, but this risk is weakening as the price of gold now exceeds $2,200.

FXStreet analysts believe that the price of gold still has some room to rise; however, gold traders need to find a continuous foothold above the record high of $2,236 in order to prolong the upward trend. The next target for gold buyers will be the $2,300 mark. However, the 14-day Relative Strength Index (RSI) is in the overbought zone, which indicates that a pullback may be imminent before the next rebound begins.

On the other hand, any pullback could find support at the previous all-time high of $2,223. If broken down here, the $2,200 mark would be an important support, followed by the 21-day simple moving average (SMA) of $2,167.

However, for traders who have not entered the market, analyst Adam Button believes that investors should wait for a pullback before taking action. Commerzbank analysts further stated:

“It's almost impossible for the Federal Reserve to be unexpected on the dovish side now, unless the data almost collapses in the next few weeks and claims that the Fed will cut interest rates earlier, but this is an unrealistic situation. However, if inflation remains high after the first two months of this year, then the Fed's interest rate cut expectations for 2024 may still “go half-way”, which will benefit the US dollar. The market needs to be prepared for the possibility that the dollar will strengthen again.”

editor/tolk