Weekly Outlook: The Fed's favorite inflation gauge is coming, can gold fly higher?

Federal Reserve Chairman Powell delivered the strongest rate cut signal to date at the Jackson Hole Symposium on Friday, ending the week on Wall Street with cheers.

With concerns about a possible economic downturn easing and expectations of a rate cut by the Fed strengthening, US stocks have rebounded from the sharp drop earlier this month. The major stock indexes closed higher for the second consecutive week, with the S&P 500 index closing just 0.6% below the historical high set in mid-July, and the Dow Jones Industrial Average less than 0.1% away from its historical high. US bond yields plunged across the board, the US dollar index remained weak, closing at a one-year low. Gold rose over 1%, back above the $2510 level. Both US and Brent crude oil rose for two consecutive days, but recorded weekly declines. Bitcoin surged to around $64,000, reaching its highest level in three weeks.

As the US Labor Day holiday approaches, the market is expected to enter a relatively calm week. Although the Fed is almost certain to cut rates in September, the extent of the rate cut still largely depends on data, and the September decision will also include the latest dot plot, making its rate path far from set in stone. The most anticipated data point next week will be the US Personal Consumption Expenditures (PCE) Price Index, which is the Fed's preferred inflation gauge.

Here are the key points the market will focus on in the upcoming week (all in Beijing time):

Central Bank Updates: Powell Turns Dovish, Is Gold Price Peaking?

Federal Reserve:

Thursday 6:00, 2024 FOMC voter and Atlanta Fed President Bostic speaks on economic outlook

Friday 3:30, 2024 FOMC voter and Atlanta Fed President Bostic speaks on monetary policy and economic outlook

With inflation approaching 2%, Powell's speech on Friday marked his clearest shift yet, moving from price stability to supporting the economy, especially the labor market. Powell stated that the US labor market has significantly cooled, and policymakers will do "everything they can" to support the labor market. He said, "Our current policy rate provides us with ample room to maneuver in response to any risks we might face, including the unwelcome possibility of further softening in labor market conditions."

Wall Street interpreted his remarks as not ruling out a rate cut of more than 25 basis points at one of the remaining three meetings this year. After Powell's speech, traders increased their bets on a significant rate cut in September, with the probability of a 50 basis point cut next month priced at 37% in Fed funds futures, up from around 25% later on Thursday. They also expect that by the end of this year, the cumulative rate cut by the Fed in the remaining three meetings will reach 106 basis points.

At the Jackson Hole Symposium, other Fed officials also made a series of speeches, but did not provide any new content. 2024 FOMC voter and Atlanta Fed President Bostic stated that they are close to being ready to cut rates and may support cutting rates more than once this year Philadelphia Fed President Harker said it is time to start cutting interest rates, and this process should be "orderly." Chicago Fed President Evans said there are ample reasons to believe that the Fed's rate cut forecasts will materialize.

As the Fed prepares to lower interest rates next month, analysts believe that gold has solid upside potential, with the price breaking above $2500 possibly marking the beginning of a larger trend. Despite the high prices, analysts suggest that gold does not seem to be overbought. Eric Strand, founder of AuAg Funds, stated that Western investors' interest in gold is just beginning, with rate cuts expected to lower the opportunity cost of holding precious metals. While Strand is bullish on gold, he added that an increase in speculative positions may cause some short-term volatility.

Adam Button, Currency Strategy Director at Forexlive.com, stated that as interest rates decline, gold will continue to shine as the US dollar weakens. He said, " This doesn't look like a market top." While Powell hinted that the Fed will proceed cautiously in the upcoming easing cycle, Button pointed out that expectations can easily shift. He believes that the Fed will be ready for a significant rate cut when a series of weak labor data emerges. Although it is not the time yet, the direction of interest rates and the US dollar is downward.

Phillip Streible, Chief Market Strategist at Blue Line Futures, believes that gold could rise to $2600 per ounce before more sustained selling pressure and profit-taking occur in the market.

Important Data: Fed's Favorite Inflation Indicator Strikes, Dollar on the Verge of Collapse

Monday 21:30, US July Durable Goods Orders MoM

Tuesday 21:00, US June FHFA House Price Index MoM, US June S&P/CS20 City Home Price Index YoY

Tuesday 22:00, US August Conference Board Consumer Confidence Index

Wednesday 1:00, US 2-Year Treasury Note Auction through August 27

Wednesday 9:30, Australia July Weighted CPI YoY

Wednesday 22:30, US Crude Oil Inventories through August 23

Thursday 1:00, US 5-Year Treasury Note Auction through August 28

Thursday 17:00, Eurozone August Industrial Confidence, Eurozone August Consumer Confidence Final, Eurozone August Economic Sentiment

Thursday 20:30, US Initial Jobless Claims through the week of August 24, US Q2 Real GDP Annualized QoQ Revised

Friday 1:00, US 7-Year Treasury Note Auction through August 29

Thursday 22:00, US July Pending Home Sales Index MoM

Friday 7:30, Japan July Unemployment Rate, Japan August Tokyo CPI

Friday 17:00, Eurozone August CPI YoY preliminary, MoM

Friday 20:30, US July Core PCE Price Index YoY and MoM, Personal Spending MoM

Friday 22:00, US August University of Michigan Consumer Sentiment Index final, 1-year Inflation Rate Expectations final

Hawks in the Federal Reserve still believe that there are some upside risks to inflation. In order to make the market's expectation of a significant rate cut this year a reality, the upcoming data must significantly cool down. Therefore, Friday's US Consumer Personal Income and Spending report will once again be a focus. The report is expected to show that the core PCE price index remains unchanged at 0.2% MoM, with a slight rebound in the YoY growth rate to 2.7%. Both the overall PCE MoM and YoY rates are expected to accelerate slightly. Meanwhile, personal spending in July is expected to grow by 0.5% MoM, which may alleviate concerns about an economic recession but could weaken hopes for a significant rate cut. Personal income is expected to increase by only 0.2% MoM, which may offset concerns about excessive spending by US consumers to some extent.

It is worth noting that the US Dollar Index has been falling for the fifth consecutive week, making it easily rebound in case of better-than-expected reports. However, analysts at Fxstreet point out that the US Dollar Index still faces a long road to recovery, with 101.90 being the first level to reclaim, followed by about 2% away at 103.18, and finally a strong resistance near 104, which is not only a key technical pivot point but also the 200-day moving average. On the downside, 100.62 (the low point on December 28 last year) will be the next important support level to avoid another collapse. If broken, 99.58 (the low point on July 14, 2023) will be the final support level.

Ahead of key inflation data next Friday, the US will also release July Durable Goods Orders, August Conference Board Consumer Confidence Index, and the second revision of Q2 GDP growth data. With limited Fed commentary, investors will have to follow the tone set by Powell at the Jackson Hole speech. However, as trading volume picks up from the summer lull, a large number of bond auctions in the coming week may stimulate some volatility in the bond market.

Against the backdrop of a weaker US dollar, non-US currencies are rebounding. The Euro to US Dollar exchange rate soared to 1.12 for the first time since July last year. Despite strong expectations that the European Central Bank will cut rates again in September, some policymakers are still hesitant. The Eurozone's CPI data for August, to be released on Friday, will play a crucial role in giving the green light to further policy easing in September. The overall inflation rate in the Eurozone is expected to slow down from a 2.6% YoY growth rate in July to 2.3% in August, bringing it closer to the ECB's 2% target The core inflation rate is expected to remain slightly stable even after excluding all volatile items. However, if the inflation data disappoints, it may further boost the Euro against the US Dollar, but is still unlikely to change the market's consensus on a rate cut in September.

As for the Japanese Yen, it is actually partly responsible for the dilemma facing the US Dollar. When the Bank of Japan raised interest rates and announced a gradual halving of asset purchases at its July meeting, the reality that Japan's long-standing ultra-loose monetary policy is coming to an end finally touched investors' nerves. Currently, the Bank of Japan seems likely to raise interest rates for the third time before the end of the year. While Governor Haruhiko Kuroda has expressed concerns about the current market instability, he still hinted that there would be more rate hikes if the economy and inflation remain on track. Therefore, the Tokyo CPI data to be released on Friday will be very important, as these data are considered a leading indicator of Japan's national inflation trend.

In Australia, inflation will also be a key focus, with monthly CPI data set to be released on Wednesday. Australia's June CPI annual rate fell to 3.8%, down from the previous months of increase. Policymakers at the Reserve Bank of Australia hope to see further declines in inflation before abandoning their hawkish stance. If there is no new progress in inflation in July, the RBA is almost certain to continue ruling out the possibility of a rate hike this year, which would be positive for the Australian Dollar, which has already risen by nearly 3% against the US Dollar in August.

Company Earnings: NVIDIA's Financial Report as a Key Catalyst, Can the US Stock Market Continue to Rise?

The next week will be a crucial test for the US stock market's upward momentum, as chip giant NVIDIA is set to release its financial report. The stock has risen by about 150% year-to-date, accounting for a quarter of the S&P 500 index's 17% gain. The company's performance announced after the market close on August 28 (Wednesday), and whether it expects the enterprise to continue investing in artificial intelligence, could be a key turning point for market sentiment entering what has historically been the most volatile period of the year. According to CFRA data, the S&P 500 index has averaged a 0.78% decline in September since World War II, making it the worst-performing month.

Some investors are already prepared for a major shake-up. According to data from options analysis company ORATS, traders expect NVIDIA's stock price to fluctuate by around 10.3% on the day after the financial report is released, a figure higher than the expected movements before any of NVIDIA's financial reports in the past three years, and significantly higher than the average 8.1% post-earnings volatility during the same period.

NVIDIA's stock price has rebounded to the 78.6% Fibonacci retracement level of the decline from July 20 to August 5, which has been a resistance level for the past few days. If it breaks through the $130 resistance level, it could set a new high, as there is not much resistance from an options or technical perspective. However, given the high expectations brought about by the significant growth over the past year, any disappointments could lead to a rapid decline in the stock price and potentially return to the low point of August 5 At the end of this earnings season, investors have become less optimistic about large tech companies as their profits have failed to justify their high valuations or massive spending on artificial intelligence. For example, companies like Microsoft, Tesla, and Alphabet have seen a downward trend in their stock prices since releasing their earnings reports in July. Matt Stucky, Chief Portfolio Manager of Stocks at Northwestern Mutual Wealth Management, stated that "Nvidia's connection to large US companies makes its earnings report a focal point for investors. The most important thing investors want to know is whether the company's growth is sustainable and what demand will look like in 2025 and 2026."

The trajectory of the US economy and monetary policy, as well as the increasingly intense presidential election, may also lead to market uncertainty in the coming weeks. John Belton, Portfolio Manager at Gabelli Funds, said, "Even though Nvidia's earnings have impressed Wall Street, the sharp rise in the stock market in August may make it difficult for the market to make further progress in the short term." The expected earnings of the S&P 500 index are 21 times, far above the long-term average of 15.7 times. Belton added, "The overall market valuation remains high, so the threshold for further gains remains high."