Inflation cools, missile strikes in the Red Sea, and yet gold prices remain flat

Today’s report by the Commerce Department came in just under the expectations of economists polled by Dow Jones. Economists were forecasting that the PCE for December would come in at 3% year-over-year. Today’s report revealed that inflation is cooling with a reading of 2.9% yearly a decline of 0.3% when compared to November’s yearly inflation level which was at 3.2%. 

Yesterday’s fourth quarter GDP report revealed a robust economy in the U.S. which grew at a rate of 3.3% in Q4. Collectively, these two reports indicate that the recent restrictive monetary policy of the Federal Reserve has made an impact on inflation, in tandem with an unexpected resilience in the U.S. economy. 

Geopolitical tension in the Red Sea continues to accelerate, with a report today revealing that Houthi militants fired a ballistic missile at the USS Carney in the Gulf of Aden on Friday. Although the ballistic missile was successfully shot down, it represents the 37th strike on merchant and U.S. Navy ships since November 19.

Gold prices are sensitive to both inflation and geopolitical conflict. However, in the case of today, it seems as though market participants are laser-focused on next week’s first FOMC meeting of the year. While it is widely acknowledged that the Federal Reserve will pivot and begin to cut interest rates this year, the first rate cut will most likely not occur this month, or at the March FOMC meeting. 

As of 5:15 PM EST gold futures basis the most active February contract is trading exceedingly flat currently up $0.40 or 0.02% and fixed at $2018.20. The dollar is fractionally lower today with a decline of 0.01% with the index fixed at 103.503. U.S. equities were also flat, with minimal price movement in the major indices. On a long-term note, gold prices have declined in three of the last four weeks. 

During the first week in January, gold sustained a $22 price decline. During the second week of January gold traded to a lower low and a lower high, however closed almost unchanged, gaining $1.80. Selling pressure returned during the third week of January, resulting in a $22.30 price decline, and finished off the fourth week of January with an additional $12 decline.

It seems that even with the news cited above, traders want more clarity which they hope to gain when the Federal Reserve concludes its meeting next Wednesday.

According to the CME’s FedWatch tool, there is a 2.6% probability of a rate cut this month. In March, the probability increases substantially with a 46.2% probability of ¼% cut and a 1.2% probability of ½% rate cut. The probability that the Fed will have begun its pivot by May is exceedingly high, with only a 9.9% probability that rates will remain at their current level after the Fed convenes the May 24 FOMC meeting.

With that in mind, market participants will focus on the Federal Reserve statement including Chairman Powell’s press conference next Wednesday as the Fed communicates its intent for the most major monetary policy pivot since it began raising rates in March 2022. Most recently, the narrative by Federal Reserve officials have expressed extreme caution when considering the timing of the first rate cut. Cleveland Fed President Loretta Mester recently said the March meeting is "probably too early for a rate cut”.

Wishing you as always good trading,