June PCE Outlook: Inflation may continue to slow down, with the Fed expected to cut interest rates in September!

At 20:30 Beijing time on Friday, the United States will release the Personal Consumption Expenditures (PCE) report for June. The market expects the PCE report to show that inflation remains under control.

Analysts' consensus expectations predict that a decline in gasoline prices will drag down the overall inflation reading, while moderation in housing and medical services prices will help further slow down the core PCE.

Analysts say that encouraging inflation data for several consecutive months will help strengthen the Federal Reserve's confidence that inflation is under control, which is what investors hope for as they anticipate this will pave the way for at least one rate cut this year.

According to FactSet's consensus estimate, economists predict that the overall PCE price index will increase by 0.08% month-on-month in June, and increase by 2.5% year-on-year. The index remained unchanged in May. Economists expect that the core PCE index, which excludes volatile food and energy prices, will increase by 0.10% month-on-month and 2.5% year-on-year.

Most of the underlying data for the June PCE report will come from the Consumer Price Index (CPI) and Producer Price Index (PPI) reports released earlier this month, so economists have been able to gain insights into the likely path of the data. While the CPI report receives attention for being released earlier, the PCE report is the Federal Reserve's preferred measure of inflation. As part of its mission, the Fed aims to bring PCE inflation back to the 2% target level, which analysts believe is a milestone the Fed is about to achieve.

Kathy Bostjancic, Chief Economist at Nationwide Mutual, said, "This will be a moderate reading." This is good news for the Fed. Several months of moderate inflation readings "completely throw the skyrocketing inflation scenario we saw in the first quarter out of the window". She said, "We are likely to continue to see inflation slowing down and getting good readings in the coming months." Bostjancic expects no change in the month-on-month growth rate for June, with her expectations slightly below the consensus forecast of 0.08%, while she expects the core index to rise by 0.1%, in line with consensus expectations.

PCE and Core PCE Data

Is Housing Inflation Finally Beginning to Ease?

While the decline in gasoline prices will lower the overall inflation rate, Bostjancic states that the Fed will pay more attention to the core readings. She expects the goods category to continue experiencing inflation slowdown, while progress in housing inflation will also echo the CPI data released earlier this month.

She said, "Encouraging signs in the CPI readings suggest that rent inflation and overall housing price pressures are easing," with sticky housing inflation being one of the main factors pushing up inflation over the past year. Although some data on rent inflation indicates a moderation in this trend, the slowdown in housing inflation in the CPI and PCE indices has only recently begun to show. Bostjancic explained that data from the past few months "indicates that the actual rental inflation component in the CPI and PCE indices has started to catch up with what we have seen in new lease data over the past few months."

Certain components of PCE may heat up

Other components of PCE data may heat up in June, but analysts are not concerned about the risk of reigniting inflation. Bostjancic pointed out that asset management fees may rise due to the strong performance of the US stock market. She explained, "This actually reflects the good performance of the US stock market," rather than a true inflation signal.

Although PPI in June was stronger than expected, analysts at Bank of America noted that components used to calculate PCE inflation were relatively soft. For example, prices for medical services and hospital services declined in June. Overall, analysts at Bank of America expect the June PCE report to show inflation in line with the Federal Reserve's 2% target. They wrote, "In summary, the slowdown in inflation over the past two months has returned to the right track."

When will the Fed cut rates?

The market is almost fully pricing in the Fed to keep rates unchanged at the July meeting, with investors looking ahead to rate cuts in September or December. As of Wednesday, according to the CME FedWatch Tool, bond futures markets are pricing in a 90% probability of a 25 basis point rate cut in September.

Federal Reserve officials have repeatedly stated that they need more confidence in ensuring that PCE inflation is moving towards the 2% target before cutting rates. Bostjancic stated that if the expected PCE reading in June appears, it will "definitely increase and strengthen this confidence." If there are no adverse inflation readings before September, she said the Fed will be "ready to cut rates."

Expected interest rate target for the Fed's September meeting

Gold Technical Analysis

FXStreet analyst Haresh Menghani stated that gold has shown some resilience below the 50-day Simple Moving Average (SMA), with the market expecting the Fed to start its rate cut cycle in September. This has kept the US dollar below the two-week high touched on Wednesday, helping gold prices attract some buying interest. However, the upside seems limited as traders tend to wait for the PCE data to be released later on Friday for clues on the Fed's policy path. This will impact the demand for the US dollar and provide new impetus for the interest-free asset gold.

From a technical perspective, gold prices have shown some resilience below the 50-day SMA for the second consecutive day on Friday, and it seems to have ended a two-day decline. Therefore, for gold to further decline, additional selling pressure needs to emerge below the approximately 2353 area of the low point of the volatility. At the same time, the daily chart oscillators have just started to show negative momentum, suggesting the least resistance path for gold prices is downward If it confirms a break below the 50-day SMA, followed by a breach of the 2350 support level, it would be seen as a new trigger for bearish traders. Gold prices may then attempt to challenge the 100-day SMA, currently around the 2325-2324 range. The latter should serve as a key turning point, and once breached, could open up towards the downside level of 2300.

On the contrary, any further rebound may attract new selling interest near the 2380 area. The next relevant resistance is at the 2391-2392 range, followed by the psychological level of 2400. If this level is breached, it could trigger a short-covering rally, pushing the gold price towards the weekly high around the 2432 area