Will CPI or completely trigger the interest rate cut expectations in September? The gold bulls face a tough challenge!

The Federal Reserve insists on not cutting interest rates until more favorable inflation data is obtained. This Thursday's Consumer Price Index (CPI) report may provide policymakers with more confidence, making the prospect of a rate cut in September clearer.

The CPI report, scheduled to be released at 8:30 p.m. Beijing time, is expected to show a year-on-year overall inflation growth rate of 3.1%, slightly lower than the 3.3% increase in May, marking the smallest annual increase since January. This is due to further downward pressure on the overall CPI from the renewed decline in energy prices. On a month-on-month basis, the overall CPI is expected to rise by 0.1%, a slight increase compared to May.

On the other hand, the core CPI, which excludes volatile food and energy costs, is expected to rise by 3.4% year-on-year and 0.2% month-on-month, marking the smallest consecutive increase in nearly a year. In times of low inflation, core prices tend to increase by 0.1% or 0.2% on a month-on-month basis.

Economists believe that although the expectations for June's CPI are "not as low as those shown in the May report, this will still be good data for the Federal Reserve."

Bank of America economists Stephen Juneau and Michael Gapen wrote in a report last week, "We expect that following the undeniable good inflation report in May, the CPI report for June will once again strengthen people's confidence in fighting inflation."

Main Obstacles to Fighting Inflation

Thursday's inflation data comes at a critical moment for the Federal Reserve's monetary policy. The slowdown in job market growth and recent testimony by Federal Reserve Chairman Powell have kept hopes of a rate cut alive.

Powell largely reiterated his data-dependent stance while testifying on Capitol Hill this week. Given the recent encouraging data, this is a positive sign.

On Tuesday, he stated at a Senate Banking Committee hearing that although there is evidence of cooling inflation, the Fed still needs more favorable data to be confident that inflation is moving towards the Fed's 2% target.

The persistently high core inflation rate in the United States is mainly attributed to rising costs in core services such as housing, insurance, and healthcare.

Junot and Gapen of Bank of America pointed out that non-housing service prices in May "unexpectedly declined, largely due to a slight decrease in motor vehicle insurance."

However, these economists expect that non-housing service prices in June (including motor vehicle insurance) will increase, indicating a bumpy road to price stability. They warned, "Given the cooling of service sector wage inflation, non-housing service sector inflation is likely to slow over time, but this anti-inflation trend is unlikely to persist."

Meanwhile, the price increases in rent and owner's equivalent rent (OER) are expected to cool off in the coming months. Bank of America stated, "This should increase the Fed's confidence in the inflation outlook." Led by Jan Hatzius, the Goldman Sachs team also believes that inflation is likely to further decline this year, due to the "rebalancing of the automobile, housing rental, and labor markets." However, they also added that the "catch-up inflation" in healthcare and car insurance, as well as the continued growth of single-unit rents exceeding multi-unit rent growth, will offset this slowdown.

Goldman Sachs currently forecasts that by December 2024, the year-on-year growth rate of core CPI will be 3.2%, and core PCE will be 2.7%, both lower than the previous forecasts of 3.5% and 2.8% respectively.

Will the rate cut in September be a sure thing?

The Federal Reserve hopes to see inflation rates consistently below 3% in order to have confidence in lowering interest rates. However, Powell stated that the Fed will not wait for the inflation rate to reach the 2% target before cutting rates. In addition, recent economic data has fueled arguments for the Fed to cut rates sooner rather than later.

The Fed's preferred inflation indicator, core PCE, showed a year-on-year growth rate of 2.6% in May, meeting expectations and marking the slowest annual increase in over three years. Last Friday, data from the US Bureau of Labor Statistics showed that the unemployment rate unexpectedly rose to 4.1%, the highest level in nearly three years.

Bank of America stated, "If the CPI report meets our expectations, we will maintain our expectation for the Fed to start a rate cut cycle in December." Nevertheless, the bank also acknowledged that maintaining a 0.2% month-on-month growth rate in core CPI would increase the risk of an early rate cut, especially considering signs of weakened economic activity.

According to Bloomberg data, investors currently expect the Fed to cut rates by 25 basis points once or twice this year, lower than the initial forecast of six times. According to the Chicago Mercantile Exchange Group (CME Group), as of this Wednesday, the market believes there is a 75% chance that the Fed will start cutting rates at the September meeting.

Financial blog Zero Hedge believes that today's CPI data will almost certainly meet or slightly undershoot expectations, as journalist Nick Timiraos, also known as the "New Fed Communications" within 24 hours, published two September rate cut previews. This means that even if the Fed may not cut rates at the FOMC meeting in July, it may very clearly signal a rate cut in September.

US stocks may be constrained by earnings season, while gold heads towards historic highs again

Tony Roth, Chief Investment Officer at Wilmington Trust, stated that if inflation data is lower than expected, the stock market may rebound, as some investors have not yet shaken off concerns from earlier this year when inflation briefly spiked.

Analysts at Bank of America pointed out that the potential downside risk to the stock market from hot CPI data is greater than the potential upside risk from soft data. The bank advised its clients that protecting downside exposure to stocks would be a prudent move, especially as the second-quarter corporate earnings season is set to begin on Friday As far as gold is concerned, the short-term technical outlook for the price of gold continues to lean towards the upside, as the 14-day Relative Strength Index (RSI) is above the 50 level. Bulls need to break above the six-week high of $2393 to regain momentum, heading towards the historical high of $2450. Before that, the level of $2400 may be a tough obstacle for them to overcome.

On the downside, the price of gold may first find support at the psychological level of $2350, and if it falls below this level, it will challenge $2340. However, if it further breaks below the 21-day moving average, it may trigger a new round of decline towards the integer level of $2300