PCE Data Shows Inflation Remains Stubborn, Muddying Fed Rate Outlook

Today's release of the Personal Consumption Expenditures (PCE) price index for March revealed that inflation remains entrenched in the U.S. economy, though not as elevated as some analysts had feared. The reaction in the gold futures market was relatively muted in response to the data.

As of 5:40 PM EDT, gold futures for the most active June 2024 contract were fixed at $2,347.20 after gaining $4.70 or 0.20% on moderate volume of 163,124 contracts. However, gold futures saw a dramatic drop this week, opening on Monday at $2,403.70 and tumbling $66.60 or 2.76%.

The core PCE price index, which excludes volatile food and energy components, increased 2.8% from a year ago in March, matching February's rise. This was slightly above the 2.7% estimate from economists surveyed by Dow Jones. The broader all-items PCE price gauge rose 2.7%, versus the 2.6% consensus estimate. Both measures increased 0.3% on a monthly basis, as expected and equaling February's gain.

George Mateyo, chief investment officer at Key Wealth, commented, "Inflation reports released this morning were not as hot as feared, but investors should not get overly anchored to the idea that inflation has been completely cured and the Fed will be cutting interest rates in the near-term. The prospects of rate cuts remain, but they are not assured, and the Fed will likely need weakness in the labor market before they have the confidence to cut."

The inflation data sets the stage for a closely watched Federal Reserve meeting next week. It is widely anticipated that the central bank will maintain its current benchmark interest rate in the range of 5.25-5.5% at the conclusion of the May Federal Open Market Committee (FOMC) meeting on Wednesday.

Fed officials, including Chair Jerome Powell, have signaled concerns that inflation continues to run hotter than expected, resulting in statements that they will need to keep rates at current levels for longer before initiating the first interest rate cut of this cycle.

Indeed, it now seems unlikely that the Fed will deliver its projected three quarter-point rate cuts this year. According to the CME Group's FedWatch tool, which tracks futures market pricing, the timeline for the first rate cut has been pushed out to September at the earliest.

The inflation dynamics evident in the PCE report suggest the Fed's rate decision next week will hinge on whether policymakers view the latest data as sufficient progress in bringing inflation back down to the 2% target or if more monetary policy tightening is still needed. Markets will be closely parsing the Fed's language and economic projections for clues on the likely path forward.

Wishing you as always good trading,