CPI Carnival Night? The market is "very dovish", gold may open up new territory!

The U.S. Consumer Price Index (CPI) report for July, which is set to be released at 20:30 Beijing time on Wednesday, will be a key moment for the financial markets, with its performance likely to impact expectations for a Fed rate cut in September. Previously, Fed Chair Powell emphasized that favorable inflation data is crucial for a rate cut in September.

According to economists' median expectations, the overall CPI may increase by 3% year-on-year in July, staying flat from the previous month; the month-on-month growth rate is expected to rebound from -0.1% to 0.2%. At the same time, the core CPI in July, excluding food and energy, is expected to slow down from 3.3% in the previous month to 3.2% year-on-year, and to slightly rise from 0.1% to 0.2% month-on-month. If the data meets expectations, the core CPI will record its smallest three-month increase since the beginning of 2021.

Anna Wong, Chief U.S. Economist at Bloomberg, stated: "We expect that driven by the slowdown in long-term expected housing rents, declining prices of used cars, and discounts in the freely disposable service categories due to consumer spending control, the CPI in July will soften."

Key Areas to Watch in the Report

Rent

By the end of 2023, core inflation excluding housing has essentially returned to pre-COVID-19 levels. However, CPI data shows that rapid growth in rents has been ongoing for most of the first half of 2024. Nevertheless, this trend sharply reversed in June, with rents seeing the smallest monthly increase since mid-2021.

Economists expect this slowing pace to continue in the coming months, helping to control the overall CPI. Rents are the largest category in this index, thus having a significant impact on determining broader inflation trends.

Economists at Wells Fargo, Sarah House and Aubrey George, stated in their August 7th data preview, "Based on the Bureau of Labor Statistics' new tenant rent index and the vacancy rate in the private sector, the deceleration trend in primary housing rents in June looks sustainable. We expect this category to rise by 0.3% month-on-month in July and remain at 0.25% to 0.30% until the end of the year."

Used Cars

Analysts are particularly focused on used cars in the composition of the CPI index. Given its weight in the index, a decline in July could help continue the downward trend in core commodity prices, with this category having declined for 12 out of the past 13 months.

Although Manheim's widely tracked wholesale used car price index saw an increase in July, the CPI index tends to lag behind, and July marks the first increase since January.

Goldman Sachs economists Ronnie Walker and Jessica Rindels stated in their August 12th data preview, "Used car auction prices have now fallen 26% from their peak, while used car prices in the CPI have fallen 18%, indicating there is further room for CPI to decline "

In addition, they expect new car prices to experience a moderate decline, as dealer promotional incentives have rebounded somewhat after the dealer software system returned to normal at the end of June.

Airfare Prices

Airfare prices are an important factor contributing to the decline in core CPI in June, with a 5% decrease marking the largest drop in a year. This has helped core service costs excluding rent to decline for the first time since mid-2021 for two consecutive months.

Citigroup economists Veronica Clark and Andrew Hollenhorst stated that the reading for July is uncertain, with both reasons for an increase and reasons for a decrease.

In their report, they wrote: "We are surprised by the weakness in airfare prices from last year, even after seasonal adjustments, airfare prices are even lower than pre-pandemic levels. We have been expecting airfare prices to rebound this year, as the sample for CPI statistics last summer may have reflected flights with lower summer demand. However, due to generally weaker travel demand compared to last year, airfare prices may continue to be weak."

Has the Focus of the Federal Reserve Changed?

Goldman Sachs senior market advisor Dom Wilson believes that the focus of the Federal Reserve has shifted from inflation to growth, reflecting both an improvement in the inflation situation and a sharp increase in concerns about growth.

He said that obviously, the impact of CPI on the Federal Reserve remains important (just as the market has responded positively to the improvement in PPI data), but the threshold for triggering a significant market adjustment is higher than it has been in the past, as the market may correctly judge that the timing and extent of rate cuts now depend more on employment and economic growth.

Goldman Sachs' forecast for CPI (expecting a 0.16% month-on-month increase in US core CPI in July) should provide some reassurance. However, Wilson pointed out that given that the main concerns at the moment are growth risks, the market is more sensitive to retail sales data and initial jobless claims later this week, and lower-than-expected retail sales data could be a bigger obstacle to the current uptrend. Nevertheless, relative to the 25% probability of an economic recession believed by the Goldman Sachs US economic team, he believes that the market may still be pricing in the possibility of an economic recession too high.

Will Gold Bulls Target the 2500 Mark?

After the slower-than-expected increase in US PPI in July on Tuesday, traders regained confidence, seemingly preparing for significant gains in Wednesday's CPI report.

Deutsche Bank's chief US economist Matthew Luzzetti said after the PPI report was released: "The market is tilting in a very dovish direction," "Expecting soft inflation data, which allows the Fed to start cutting rates."

Gold bulls are also anticipating a more moderate US CPI report, as the previous PPI data eased the correction downward in gold prices, as gold near historical highs typically faces profit-taking before the release of CPI data A milder-than-expected CPI report may confirm bets on the Federal Reserve taking aggressive and substantial interest rate cuts, strengthening the trend of a weaker US dollar. In turn, the price of gold may hit new historical highs. Additionally, gold will continue to be supported by the geopolitical tensions in the Middle East, as the market prepares for Iran's imminent attack on Israel. Speeches by Federal Reserve policymakers will also influence the price of gold.

According to the FedWatch tool from the Chicago Mercantile Exchange Group, the probability of the Federal Reserve cutting interest rates by 50 basis points in September is 54%.

Fxstreet analysts point out that based on the daily chart, the price of gold is challenging the upper boundary of a symmetrical triangle pattern, currently at $2471. Gold bulls hope that the US CPI data can ensure the daily closing price of gold above this level, potentially triggering a new uptrend towards $2500. Before that, a breakthrough above the historical high of $2484 is needed. The 14-day Relative Strength Index (RSI) is trending downwards, but still above 50, suggesting that any pullback in the price of gold may continue to be bought.

On the other hand, an unexpected increase in US CPI data may reignite selling interest, pulling the price of gold back to the 21-day moving average support at $2420. Prior to that, the high point of August 9 at $2437 may provide some support. If selling momentum intensifies and the 21-day moving average support is broken, the next relevant support level will be at $2380, where the lower boundary of the triangle pattern and the 50-day moving average converge