Tonight, focusing on the "favorite" inflation indicator of the Federal Reserve!

The Fed's favorite inflation indicator - Core PCE Price Index is expected to rebound slightly in July, will this trend "cool down" the rate cut expectations for September?

The U.S. Department of Commerce will release the July PCE Price Index at 8:30 am Eastern Time (20:30 Beijing Time), which is also the last PCE report before the September interest rate decision.

According to the latest survey by the Dow Jones Index:

The July PCE Price Index is expected to rise by 2.5% year-on-year, unchanged from the previous value, with a month-on-month increase expected to rise from 0.1% in June to 0.2%.

The Core PCE Price Index is expected to rise by 2.7% year-on-year, up 0.1 percentage point from June, with the month-on-month increase expected to remain at 0.2%.

Even with a slight rebound in PCE prices, it is difficult to change the Fed's determination to cut interest rates

Wall Street believes that if tonight's data matches the forecasts, then Fed officials are unlikely to abandon the highly anticipated rate cut measures at the September 17-18 rate decision.

Burns McKinney, Managing Director and Portfolio Manager at NFJ Investment Group, said:

The rate cut in September is already a done deal, and the PCE trend will not change this outcome. The Fed has made up its mind, they have sent a very strong and gentle signal that they will definitely start the rate cut cycle in September.

Beth Ann Bovino, Chief Economist at Bank of America, holds a similar view, stating that the slight increase in inflation will not change the Fed's determination to cut interest rates, as this is just the base effect at work.

In my view, this is just another piece of evidence confirming that the Fed is seeing inflation steadily declining at a sustainable pace.

At the global central bank annual meeting held last week, Powell sent the strongest signal to date, saying "it's time to relax monetary policy now", and the economic data over the past few months has convinced the Fed that inflation is steadily returning to the central bank's 2% target level.

Gregory Daco, Chief Economist at EY, predicts that with easing housing cost inflation, slowing wage growth, and strong productivity growth, the core PCE inflation rate is expected to slow to around 2.5% by the end of 2024.

With the establishment of a downward trend in inflation, the focus is shifting to the labor market

Powell stated that "confidence in inflation returning to target has strengthened", but remains cautious about the labor market, with the Fed's focus now shifting from combating inflation to supporting employment.

The upside risks to inflation have diminished, while the downside risks to employment have increased.

In response, McKinney said:

Powell has always warned not to focus too much on a single data point, if you observe the trend, regardless of any changes in (PCE data), the downward trend in inflation is basically locked in.

Although there is still disagreement in the market about the extent of the Fed's rate cut in September, most believe that a significant rate cut this year may be a bit hasty.

The CME Group's FedWatch Tool shows that the probability of a 25 basis point rate cut in September has decreased from 75% a week ago to 67.5%, while the probability of a 50 basis point rate cut has increased to 32.5%

How is the market reacting?

Before the release of the PCE price index on Friday, the three major US stock index futures rose slightly, while the US dollar and US Treasury bonds remained stable.

Matt Lloyd, Chief Investment Strategist at Advisors Asset Management, stated that the PCE report no longer has the same impact on central bank decisions as it used to.

He mentioned that the US Labor Day (the first Monday in September) falls on a long weekend, so the financial markets on Friday may not react significantly to the PCE data and remain neutral. However, the stock market will pay more attention to the August non-farm payroll report to be released next week.

Currently, the labor market may influence whether the central bank will cut interest rates by 25 basis points or 50 basis points at the next meeting.

Lloyd also mentioned the possibility of increased volatility in the financial markets on Friday, as trading volume is expected to remain light, which could "distort the returns of US Treasury bonds and stocks"