Inflation Maybe on Track, but Is a Bigger Rate Cut Coming?

Economists are expecting the August Consumer Price Index (CPI) data to show continued progress in easing inflation. The consensus predicts a 0.2% month-over-month increase in both headline and core inflation, with headline inflation slowing to 2.6% year-over-year. Core inflation, which excludes food and energy, is anticipated to hold steady at 3.2%. This would mark the lowest headline inflation rate since February 2021. The Cleveland Fed's Inflation Nowcasting model aligns with these projections, suggesting a headline CPI of 2.56% year-over-year and core CPI at 3.21%. Analysts are optimistic, with many signaling that the data should reinforce the narrative of moderating inflation.

From my point of view, the upcoming CPI report should provide further evidence that inflation is steadily moving in the right direction. If the headline inflation drops to 2.6% as expected, it would be a significant sign that inflationary pressures are easing, especially considering how far we've come since 2022. While the labor market remains strong overall, recent employment data from last week suggests signs of weakening. This could prompt the Fed to adopt an even more cautious approach moving forward. If the trend of a softening labor market continues, it may increase the likelihood of a more significant rate cut, as the Fed will likely prioritize balancing inflation control with supporting employment.

I see a 25-basis-point rate cut in September as the most probable outcome, but if in the future, the labor market continue shows any signs of cooling or if inflation drops faster than expected, a larger cut could be on the table.

The S&P 500 Index is currently positioned at 5471.05. If the upcoming CPI data meets or exceeds expectations, it is highly likely that the index could rally once again, potentially reaching its previous high of 5647.58.

Gold price edges lower as USD benefits from reduced expectations of a 50 bps Fed rate cut. The downside remains limited as traders look to US inflation numbers for a fresh impetus. From a technical perspective, the range-bound price action witnessed over the past three weeks or so constitutes the formation of a rectangle on the daily chart. Against the backdrop of the recent rally to the all-time peak, this might still be categorized as a bullish consolidation phase. Moreover, oscillators on the daily chart are holding in the positive territory, validating the near-term positive outlook for the Gold price. That said, it will still be prudent to wait for a sustained breakout through the trading range resistance, or the all-time peak around the $2.530-2,532 region, before positioning for any further appreciating move. On the flip side, any meaningful slide is likely to find some support near the $2,485 area ahead of the $2,470 horizontal zone. #CPI #StockMarket #Gold

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