The Fed’s preferred measure of inflation is the Core PCE print that comes out on Friday. Around 2012, the PCE index became the main inflation index used by the Federal Reserve to inform its policy decisions. Investors will be looking at this print to try to answer 2 crucial questions: will the Fed hike and pause rates in May and will the Fed cut rates this year?
The Fed, like central banks around the world is determined to bring inflation down to its 2% target. Last month, the Core PCE price index fell to 4.6% for February. The Fed will want to see this figure dropping lower again this month in order to have reassuring signs that it is winning the inflation battle. The core reading is expected to stay at 4.6%, so investors will be watching carefully for any surprises in the print for clues as to the Fed’s path for policy rates.
The headline is expected to fall to 4.5%y/y from the prior reading of 5% and that will be in keeping with the gentle stepping lower in the reading there has been from last summer’s peak.
A clear opportunity would most likely present itself in gold. This is due to the fact that bond yields, inflation, and the USD all heavily influence gold prices. If the inflation print comes in much lower than expected that that could mean inflation expectations fall, the USD falls and bond yields fall. All of which is a natural support for gold. If the inflation print comes in much higher than expected then that could potentially send bond yields higher, inflation expectations higher, and the USD higher all of which is a natural headwind for gold. Therefore, watch gold price on an out of consensus print for a potential short-term trading opportunity.