PCE and Powell Collide with Market Closure, Will the Market "Jump Around" Next Monday's Opening?

At 20:30 Beijing time on Friday, the United States will release the February PCE price index. For traders eager to understand whether the Federal Reserve will cut interest rates three times this year and whether the first cut will be in June, tonight's report may confirm that the United States has had a poor start in terms of inflation this year.

Economic data from January and February show that the U.S. economy is quite resilient, the labor market remains hot, and inflation is still higher than expected. The Federal Reserve took a wait-and-see attitude on interest rate cuts this year at last week's interest rate meeting, while assessing whether the progress of reducing inflation to the annual target of 2% has stagnated.

Advertisement

Economists expect that the index will once again show that price pressures remain high. Data from FactSet shows that economists' general expectation for the overall PCE data is that it will rise by 0.4% in February following a 0.3% increase in January; the year-on-year growth rate will reach 2.5%, higher than January's 2.4%.

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

On the other hand, U.S. consumers are increasingly convinced that the inflation rate will continue to decline. The latest survey released by the University of Michigan on Thursday shows that consumers expect the inflation rate to drop to 2.9% next year, lower than the 3% expected in February. The expectation for long-term inflation is 2.8%, lower than the 2.9% a month ago. Joanne Hsu, director of the Consumer Survey, said:

"Consumers show confidence that inflation will continue to slow down."

Inflation risks may be biased towards the upside! Is the Federal Reserve "asking for trouble"?

The earlier released CPI data injected some anxiety into Wall Street, forcing some investors to lower their expectations for the timing of the Federal Reserve's first interest rate cut. This is why tonight's PCE data will be more important than usual, which may "confirm" whether the Federal Reserve will cut interest rates three times this year and make the first cut in June.

Federal Reserve officials "stood still" for the fifth consecutive time last week, and at the same time, the dot plot showed that policymakers expected to cut interest rates by 75 basis points by the end of 2024, that is, to make three 25-basis-point cuts. The market began to believe that the June interest rate cut was almost a "done deal".Despite Powell having mentioned that the stickiness of recent inflation data is not a reason for the Federal Reserve to change its plans, higher-than-expected core PCE combined with strong income and expenditure data will raise concerns about accelerating inflation in the coming months.

The U.S. core CPI inflation rate for February decreased from 3.9% to 3.8%, but it was higher than the forecast of 3.7%. Additionally, the overall PPI for February rose by 0.6%, while the core PPI increased by 0.3%. These figures may indicate to some extent that the core PCE is also higher than expected.

At the press conference following the FOMC meeting on March 20, Powell stated that the higher-than-expected inflation data for January could be partly attributed to seasonal adjustments at the beginning of the year.

"Nevertheless, we do not want to completely ignore it," Powell said. "We currently expect the core PCE for February to be below 0.3%, which is not very hot. So... I consider these two things together, and I believe they have not really changed the overall situation, that is, inflation will gradually decrease to 2% on a winding path."

For the Federal Reserve, which insists on the expectation of three rate cuts within the year, Quant Insight, managing over $7 trillion in total assets, raises a question about whether the Federal Reserve is making a policy mistake and "cornering itself" by sticking to the forecast of three rate cuts in 2024, each by 25 basis points.

In a report this week, Quant Insight asked, "Faced with strong GDP growth, a tight labor market... PMI index above 50, rising energy and metal prices, and the upcoming three rate cuts, has the disinflation process now stopped?"

Furthermore, in the short term, some domestic factors in the United States may continue to exacerbate inflationary pressures. For example, the rise in gasoline prices, as is usually the case in the summer, the prospect of the average gasoline price across the United States reaching $4 per gallon is still debatable. At the same time, analysts are also assessing whether this week's bridge collapse in Baltimore will exacerbate supply chain disruptions.

Mark Heppenstall, Chief Investment Officer at Pennsylvania Mutual Asset Management in Horsham, Pennsylvania, said:

"I do believe that the Federal Reserve allowing financial conditions to become so loose is creating trouble for itself."

It is worth noting that at 11:30 PM, Powell will deliver a speech at the San Francisco Fed event on "Macroeconomics and Monetary Policy." If PCE inflation exceeds market expectations, Powell may change his tone and lean more towards the hawkish camp.Will the PCE have little impact on the market? Gold may still have room to rise after hitting new highs!

Despite two major events today, one question is - the United States is closed on Friday for the Good Friday holiday, and investors' views on PCE data may not become clearer until Monday. In this regard, Mike Cornacchioli, Senior Vice President of Investment Strategy at Citizens Private Wealth Management, believes that he expects a relatively mild reaction in the financial market, as investors may pay more attention to future events affecting the market than historical events.

"I think the risk of this report is downward," 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 rate cut window may close."

For 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 long positions to continue to clear continuously, but as gold prices have now exceeded $2,200, this risk is diminishing.

FXStreet analysts believe that gold still has some room to rise, but gold traders need to find a sustained foothold above the record high of $2,236 to extend 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 area, indicating that a pullback may be imminent before the next rebound begins.

On the other hand, any pullback may find support at the previous historical high of $2,223. If this level is broken, the $2,200 mark will be an important support, followed by the 21-day simple moving average (SMA) at $2,167.

However, for traders who have not entered the market, analyst Adam Button believes that investors seem to wait for a pullback before making a move. Commerzbank analysts further pointed out:

"The Fed is now almost impossible to surprise on the dovish side, unless data collapses in the next few weeks and advocates that the Fed will cut rates earlier, but this is an unrealistic situation. However, if inflation remains high after the first two months of this year, the Fed's expectations for rate cuts in 2024 may still be 'half-hearted', which will be beneficial to the US dollar. The market needs to be prepared for the possibility of the US dollar strengthening again."