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Investors Await Next Key Inflation Barometer

May 29, 2024

Investors are awaiting the next key inflation barometer in the form of the Core PCE price index this week, with the outcome potentially swaying the odds between a possible September or November rate cut from the Fed. The data, due for release on Friday, is of particular interest to the FOMC when assessing inflationary trends, and as such a surprise result either side of the 0.3% increase expected could either dash or rejuvenate rate cut hopes for Q3. Given the possible interest rate implications, we could see some heightened volatility around this data release for bonds, equities, and FX.

Today, the latest Australia inflation data was released and the tick higher in CPI during April will not have made for pleasant reading for the RBA (Reserve Bank of Australia). On a year-on-year basis, CPI moved from 3.5% to 3.6%, surpassing expectations of a decline to 3.4%. The AUDUSD rate moved past 0.6650 after the higher inflation print, with a near-term Australian rate cut seemingly nowhere in sight with inflation tracking away from the 2-3% target band.

Elsewhere, the Dollar Index was holding steady around the 104.60 level despite a move higher in the 10-year treasury yield (following weak auction demand). In Japan, the latest BOJ Core CPI data came in softer than expected at 1.8% versus 2.2% previously, sending the USDJPY rate higher. While the Euro has been edging against the USD on growing expectations that June may usher in a first rate cut from the ECB.

Gold is still trading in recovery-mode following it’s post record-high slump last week. A little over a week ago, the precious metal hit an all-time high of $2449, however a hawkish-sounding Fed contributed to the price sliding below $2330. Overnight, gold made a modest mover higher and was seen trading at $2357 during Asian market hours on Wednesday. Some key levels to watch in coming days in the lead up to the US Core PCE release include support at $2343 and $2332, while resistance on the topside awaits at $2379, a breakthrough of which would potentially open the door for a run back towards $2400. A softer US Core PCE release would make the job easier for gold to reclaim the $2400 level, given the possible rate-cut timing implications.

Oil is having a better week with the WTI contract regaining the $80 level. Much of the oil market moves this week are about positioning ahead of the OPEC+ meeting (June 2), where the group is likely going to inclined to extend the existing production cuts as a way of countering a still patchy demand outlook. Whether oil can make further gains of any significance from here may depend on how determined or otherwise OPEC+ sound with regards to keeping the reigns pulled on production levels.

For the remainder of the trading week, aside form US Core PCE, investors will also be keeping an eye on China’s latest manufacturing and non-manufacturing PMI’s (due for release on Friday). The trend has been for the services sector to outperform the manufacturing sector in the world’s second largest economy, so we will be looking for any signs that the manufacturing sector may be starting to catch-up considering some more positive indicators from China over the last few months.

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