Gold Trading Alert: PCE data showed that U.S. inflation slowed in February, and gold prices opened more than $10 higher, setting a new all-time high

In early trading in Asia on Monday (April 1), spot gold opened more than $10 higher, hitting a record high of $2,245.18 per ounce, as the February PCE data released last Friday (March 29) showed rising prices in the United States. Modest housing and a sharp slowdown in the cost of services other than energy kept the Fed still likely to cut interest rates in June, while the gold market was closed for the Good Friday holiday on Friday and digested the impact of the data on Monday.

U.S. inflation slowed in February

The Bureau of Economic Analysis of the U.S. Department of Commerce said on Friday that the personal consumption expenditures (PCE) price index rose 0.3% month-on-month in February. Analysts had expected growth of 0.4%. January data was revised up to a rise of 0.4% from a 0.3% increase in the previous month.

Jeffrey Roach, chief economist at LPL Financial in North Carolina, said: "Core services inflation is slowing and may continue to do so throughout the year... By the time the Fed meets in June, these data should be convincing enough, Let them begin the process of normalizing interest rates."

Commodity prices rose 0.5% last month, boosted by a 3.4% jump in the cost of gasoline and other energy products.

Prices for recreational goods, vehicles, apparel and footwear also increased strongly. But prices for furniture, home equipment and other durable goods were more subdued.

The PCE price index increased by 2.5% in February compared with the same period last year, and increased by 2.4% in January.

Although price pressures are waning, with growth slowing compared with the first half of last year, inflation remains above the Fed's 2% target.

Federal Reserve Chairman Jerome Powell said on Friday that February's inflation data was "more consistent with what we wanted to see."

Federal Reserve officials last week kept the central bank's policy rate unchanged at the current range of 5.25%-5.50%, having raised rates by 525 basis points since March 2022.

Policymakers expect to cut interest rates three times this year. Financial markets expect the first rate cut to come in June. Most U.S. financial markets, except for foreign exchange markets, are closed for the Good Friday holiday. Affected by the inflation data, the U.S. dollar fell slightly against a basket of currencies on Friday, providing an opportunity for gold prices to rise on Monday.

Everett Millman, chief market analyst at Gainesville Coins, said another reason for the rise in gold prices is that "global geopolitical tensions remain tense," which may prompt investors to buy gold as a neutral reserve asset.

The core PCE price index, which excludes volatile food and energy prices, increased by 0.3% in February from the previous month. January's growth was revised up to an increase of 0.5%, compared with an increase of 0.4% in the previous month.

The core PCE price index increased by 2.8% year-on-year in February, the smallest increase since March 2021. It increased by 2.9% in January. The Federal Reserve refers to the PCE price index to formulate monetary policy.

The month-on-month increase in the PCE price index has remained at 0.2% for a period of time, which is a necessary condition for inflation to return to the target. Although some of the stronger data in the consumer and producer price reports did not reappear in the PCE price data due to different weights, some sticky factors still exist.

In the past three months, the core PCE price index rose 3.5% year-on-year.

Prices for services rose 0.3%, a slowdown from January's 0.6% rise. Housing and utility costs rose 0.5%. There were also solid price increases for entertainment services, as well as financial services and insurance.

But there was no change in prices for dining out, hotels and motel services, there was little increase in prices for transportation services and there was a slight increase in health care prices.

The PCE services price index, excluding energy and housing, rose 0.2% in February after rising 0.7% in January. The super core price index rose 3.3% in February after rising 3.5% year-on-year in January. Policymakers are watching the super core inflation rate to assess their progress in fighting inflation.

Over the past three months, super core inflation has been 4.5%, which some analysts believe supports delaying a rate cut. But other analysts believe the rise in the index was the result of a surge in prices in January and do not believe it signals a change in trend.

"Six drivers of a surge in core inflation from 2021 to 2022 - profit expansion, rapid wage growth, surging rents, supply chain disruptions and the pass-through effects of rising global food and energy prices - - have normalized or are normalizing, with no substantial signs of reversal.”

"This means that the basic pressure on inflation is declining, but there may be some fluctuations in individual months, but it will not change the overall situation."

Consumer spending hits biggest jump in more than a year, underscoring economic resilience

A report released by the U.S. Department of Commerce on Friday also showed that consumer spending last month increased by the largest amount in more than a year, highlighting the resilience of the U.S. economy. Despite rising borrowing costs, the U.S. continues to outperform its global peers thanks to continued strength in the labor market.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.8% last month. This is the largest increase since January 2023, when it rose 0.2%. Consumer spending, adjusted for inflation, rebounded 0.4%, reversing a 0.2% decline in January.

Real consumer spending growth suggests consumption may have retained much of its momentum in the first quarter. This prompted the Atlanta Fed to raise its forecast for annualized gross domestic product (GDP) growth this quarter to 2.3% from 2.1%.

Data from the U.S. Bureau of Statistics showed that both wholesale and retail inventories increased rapidly in February, offsetting the impact of a 1.5% expansion in the merchandise trade deficit and providing support for growth prospects.

But most spending came from savings as income growth slowed to 0.3% from 1.0% in January. After adjusting for inflation and taxes, household disposable income fell by 0.1%. The savings rate fell to 3.6% from 4.1% in January, the lowest level since December 2022.

Nationwide chief analyst Kathy Bostjancic said, "As long as job growth remains strong, it can support healthy spending. However, if the labor market softens, consumers are generally not ready to respond."

Outlook

On Monday, ISM will release the U.S. Manufacturing Purchasing Managers Index (PMI) data for March, which investors need to pay close attention to. The overall PMI is expected to rise slightly to 48. If the index is above 50, the US dollar will receive an immediate boost, which will be negative for gold prices. Investors will also keep a close eye on the Price Payments Index, the inflation component of the PMI survey. In January and February, the price index remained above 50, after staying below this level for eight consecutive months. If the inflation sub-index falls back below 50, indicating a pullback in manufacturing input prices, the dollar may struggle to find demand, weakening gold prices, even if the main PMI data is better than expected.

This Friday the U.S. Bureau of Labor Statistics will release its highly anticipated labor market report. Nonfarm payrolls (NFP) are expected to increase by 200,000 in March after rising by 275,000 in February. The U.S. unemployment rate is expected to hold steady at 3.9% in March, while monthly wage inflation, measured by changes in average hourly earnings, is expected to rise to 0.3% from 0.1%.

FXStreet analyst Eren Sengezer pointed out on Friday that although February's non-farm payrolls data significantly exceeded market expectations, the dollar was still facing selling pressure because the data for January and December last year were revised downwards. If March non-farm payrolls data is stronger than expected and there is no significant revision to past data, the dollar could outperform its rivals and put knee-jerk pressure on gold. On the other hand, weak non-farm payrolls growth could hurt the dollar. The upbeat non-farm payrolls data, accompanied by a downward revision to the previous value, failed to allow the dollar to profit from the data.

Because Monday coincides with the Easter holiday, financial markets in most European and American countries are closed, and it is expected that the overall market trading may be subject to certain restrictions.

At 06:29 Beijing time, spot gold is currently trading at $2,241.50 per ounce.