Can the US CPI return to the "2-digit head" tonight? The key to the resumption of gold rally is this!
Fed rate cut expectations will be tested again tonight! Is "victory" not far away? Gold may be prone to "short squeeze", and the key to regaining its upward momentum is......
At 21:30 Beijing time on Tuesday, the United States will release January CPI data, and economists surveyed by foreign media expect that the monthly inflation report of the U.S. Department of Labor will show that overall consumer prices rose 2.9% in January from the same period last year, the smallest increase since March 2021.
They estimate that core CPI will rise 3.7% year-on-year, the smallest increase since April 2021. But this level is still well above pre-pandemic levels, especially for goods that most Americans regularly buy, such as groceries.
The pain of rising prices in the past may be part of the reason why many Americans remain pessimistic about the economy. An analysis conducted by Goldman Sachs economists suggests that disappointment with high price levels may have contributed to the continued slump in the confidence index in the early 80s of the last century, even after a sharp decline in inflation. Jan Hatzius, chief economist at Goldman Sachs, said:
"Consumer confidence seems to be taking some time to recover, in part because the focus is on the level of inflation, not change. ”
Inflation data in recent months has been lower than it was a year ago, and economists expect this to continue in January. They estimated a seasonally adjusted headline price increase of 0.2% from the previous month and a core price increase of 0.3%.
The Fed's favored inflation gauge, the PCE price index, which will be released later this month, has been below the Labor Department's data. But even taking into account this fact, last month's CPI inflation rate is likely to remain above the Fed's 2% target.
The disinflationary process is "full of bumps"
Economists widely expect inflation to cool this year, though they warn that the process could be bumpy. For example, the resolution of supply chain issues has helped keep prices down for many goods, while used car prices, which became a major source of inflation shortly after the pandemic, have been declining recently. New rental prices have also cooled over the past year, judging by data from private providers and the Department of Labour's New Tenant Rent Index.
On the other hand, Morgan Stanley economist Diego Anzoategui warned that inflation in some service prices could get tricky, which could put upward pressure on monthly price data. He said:
"We believe that inflation, especially in the first quarter of this year, will be slightly higher than it has been in the last six months. In the second half of the year, we expect more disinflationary processes in the services sector. ”
Bank of America said core inflation remains particularly tricky due to high housing prices and "volatile" categories such as used cars, transportation services and out-of-home accommodations.
Bank of America economists Stephen Juneau and Michael Gapen wrote in a note to clients on Monday that "the good news is that we expect housing inflation to slow this year, given the deflation in rental inflation." ”
When will the rate cut actually come?
This is despite the fact that the annual rate of US CPI has been above the Fed's target of 2%. But the Fed's favorite inflation measure, the core personal consumption expenditures price index (PCE), has fallen below this level at a six-month annual rate, reinforcing hopes that the Fed may start cutting interest rates.
Fed officials also believe that inflation may have been brought under control, which is a big reason why they expect a rate cut later this year. Fed Chair Jerome Powell said at a press conference after the Fed's policy meeting two weeks ago: "So we have six months of good inflation data. ”
But he added that Fed officials want to see more evidence to "confirm what we've seen and give us confidence that we're on a sustainable path." ”
According to CME Group, the market is pricing in a nearly 85% chance that the Fed will keep interest rates unchanged in March. The Fed is widely expected to start cutting interest rates at its May meeting, with a probability of about 60%.
Bank of America does not expect the Fed to cut interest rates until June. "A report that is in line with our expectations will continue to boost the Fed's confidence and support our expectations for the first rate cut in June," the bank's economists said. ”
Fed officials also echoed Powell's cautious remarks, with Cleveland Fed President Mester saying in a speech last week that "it would be a mistake to cut rates too early or too quickly in the absence of ample evidence that inflation is on a sustainable and timely path back to 2%." ”
Minneapolis Fed President Kashkari added that the Fed is "not yet at the end of its game" when it comes to tackling inflation, while Boston Fed President Collins said she "needs to see more evidence" that inflation is moving closer to the Fed's 2% target.
Both Mester and Collins said that rate cuts could come "later this year". "They seem to be concerned that much of the reason why the disinflationary process is being stalled is the fall in commodity prices, and that may not be sustainable," Gapen said. ”
UBS chief economist Jonathan Pingle wrote in a forward note on Friday that "the longer the FOMC waits for a rate cut, the more likely it is that their determination to fight inflation will gain credibility." Of course, there are risks associated with this strategy, as inflation expectations are already below what they were at 2% on average, and they are still relying on 'outdated' economic activity data. ”
Some consumer pessimism about the economy seems to be fading. The New York Fed reported Monday that the share of respondents in its monthly consumer survey who believe household finances will improve in a year rose to 34.1% in January, the highest level since September 2020, from 30.6% in December. The survey also showed that consumers expect prices to rise by 3% next year, the lowest level since December 2020. Pingle concludes:
"Overall, inflation appears to be coming down faster than the FOMC expects, and the decline in inflation will be the 'macro theme' for the first half of the year. ”
Gold is prone to a "short squeeze"? The key to regaining its upward momentum is......
Given the rhetoric of Fed officials, an upside surprise could provoke a bigger reaction tonight than a downside surprise. A higher-than-expected CPI reading will give credibility to the Fed's cautious rhetoric.
TD Securities economists said fund managers increased their net exposure to gold modestly, even though a strong jobs report may suggest that the Federal Reserve is not in a hurry to start easing monetary policy. For now, gold investors' positioning remains at historic lows, and open interest in gold remains at levels that preceded a sharp rebound. This highlights that gold has matured for asymmetry and is prone to a substantial short squeeze as Fed officials consider starting a rate-cutting cycle.
FXStreet analysts said that the unexpected upside in US CPI data could strengthen the Fed's hawkish rhetoric, triggering a new wave of selling in gold prices. On the other hand, weaker-than-expected data could revive market expectations for an early Fed rate cut and trigger a recovery rebound in the precious metal.
At present, gold has fallen below the ascending trendline support level of $2024, and the $2,000 mark will be tested with a technical breakout, but until then, gold still has static support at $2,010.
If selling pressure intensifies, gold could break below the $2,000 mark and test the 100-day simple moving average (SMA) at $1,992. The 14-day Relative Strength Index (RSI) is well below 50, suggesting more pain for gold buyers.
Conversely, if gold manages to hold the 2010 support level, the 2024 trendline support level turns into a resistance level. A break above the 2027 21-day moving average could be on the lookout, while a break above the 2033 50-day moving average could allow gold to regain upward momentum and distant resistance towards $2040.