US Inflation Eases Slightly; Gold’s Gains Resume
NEW YORK (May 16) After mildly lower inflation and weaker advance GDP for the first quarter in the USA, there are some signs that the economy is cooling off. The dollar has taken a hit from recent releases in most of its pairs while gold has returned close to all-time highs. This article summarises recent news, data and expectations for the next meeting of the Federal Reserve (‘the Fed’) then looks briefly at the charts of XAUUSD and EURUSD.
Although headline inflation in the USA had been higher than the consensus for many months, that scenario seemed less likely for April’s release due to the unexpectedly lower result from the NFP. April’s NFP missed the consensus by about 70,000, which is significant in itself but also important because it breaks the long trend of positive surprises. As a result, inflation declined negligibly:
American annual headline inflation
Inflation remains sticky and significantly above the usual target of 2%, so the Fed’s understandably not in a rush to start cutting rates. Although the American economy is certainly showing signs of slowing down based on recent GDP and job data, as yet there’s no clear indication of the recession which had been expected for so long. The first meeting of the Fed where a majority expects a cut to the funds rate is September:
Source: CME FedWatch Tool
The total probability of at least one cut by September is around 72%, more-or-less unchanged from a month ago. The Fed’s likely to be looking for a sustained decline in inflation primarily but also secondarily a reasonable amount of evidence of a slowdown in the job market before starting to cut. If this chart is correct and the first cut is indeed in September, it’s questionable whether the Fed will cut three meetings in a row before the end of the year.
The narrative of recession or ‘necessary economic slowdown’ has moved out of focus for most of 2024 so far, with traders now concentrating on what the Fed might do to avoid a repeat of the mistake in the 1970s when rates were cut too quickly and inflation surged back. That might be nothing: Jerome Powell ruled out further hikes at the Fed’s last meeting on 1 May, but policy has now been restrictive for some time, so maybe it’s just a case of waiting for inflation to decline.
Next week’s minutes might give some clues on how the Fed sees the situation developing, but 7 June’s NFP is also crucial. If there’s another decline in new jobs, a cut in September might become more likely or expectations could even shift forward to July.
FXEmpire
