Gold Breaks Above $2,400 As U.S. CPI Beats Expectation In June

(July 11, 2024 - Ernest Hoffman)

(Kitco News) - Gold prices are setting new session highs above $2,400 per ounce after U.S. consumer prices cooled more than expected in June, boosting hopes for a September rate cut from the Federal Reserve.

The Consumer Price Index (CPI) fell -0.1% last month after May’s flat 0.0% reading, the U.S. Bureau of Labor Statistics said on Thursday. The latest inflation data was better than expected, as economists were looking for a 0.1% increase.

The report said that in the last 12 months, headline inflation rose 3.0%, below expectations for a 3.1% reading and slower than May’s 3.3% print.

Core CPI, which strips out volatile food and energy prices, increased 0.1%, better than expectations for 0.2% and May’s 0.2% increase.

The report said that annual core inflation rose 3.3% in June, also better than expectations and the 3.4% reading from the prior month.

The gold market is seeing a strong bullish reaction to the better-than-expected inflation data. Spot gold immediately shot above $2,400 per ounce in the minutes following the CPI release, last trading at $2,402.45 per ounce, up 1.31% on the session.

“This is officially the first NEGATIVE month-over-month inflation print since May 2020,” wrote The Kobeissi Letter in an X post. “The Fed is going to love this inflation report.”

“The -0.1% monthly print might put new wind in Team Soft Landing's sails, but remember that in mainstream economics, deflation signals economic contraction,” warned Lobo Tiggre, analyst and the Editor of the Independent Speculator.

Paul Ashworth, Chief North America Economist at Capital Economics, said that the CPI report qualifies as ‘more good data’, but it's not all good news.

"The muted 0.1% m/m increase in core CPI in June strengthens the case for a September rate cut although, while a lot still depends on the PPI data due tomorrow, our initial estimate is that the core PCE deflator increased by closer to 0.2% m/m," Ashworth wrote in a note shared with Kitco News. "The upshot is that this report isn’t quite as good as it looks."

"All-item prices fell by 0.1% m/m, partly thanks to a 3.8% drop back in gasoline prices, with the all-items annual inflation rate down to 3.0%," he noted. "The 0.07% m/m increase in core CPI was enough to drag the annual core rate down to 3.3%, with the 3m annualised rate plummeting back to 2.1%. Rent and owners’ equivalent rent both increased by a more muted 0.3% m/m, the smallest gains in close to three years. Airline fares fell by 5.0% m/m and lodging away from home prices were down by 2.0%, indicating that the post-Covid travel boom may be over, while new vehicle prices declined by 0.2% m/m and used vehicle prices fell by 1.5% m/m. It also helped that medical care services increased by a smaller 0.2% m/m and motor vehicle insurance prices increased by a more modest 0.9% m/m."

Not all of that is good news for the Fed’s preferred PCE measure, however, which uses the PPI measures of airline fares and medical care services and puts a lower weight on the housing components," Ashworth said. "Our initial estimate points to a 0.19% m/m increase in core PCE, which is roughly consistent with the 2% target, but not as low as this June core CPI reading. Nevertheless, with Fed officials also apparently getting a little more nervous about labour market weakness, it does strengthen the case for a September rate cut."

Michael Brown, Senior Research Strategist at Pepperstone, sees this report opening the door wider for a September rate cut.

“The June US CPI report will come as further welcome news to the FOMC, with the data showing a further easing of price pressures, and likely helping to provide further 'confidence' that inflation is indeed on track to return towards the 2% price target," Brown wrote in a note to Kitco News.

"While one inflation report won't make up policymakers' minds on its own, the figures add to the body of evidence pointing towards a September rate cut, following last week's softer-than-expected June jobs report, and coming after Chair Powell's Congressional testimony earlier this week, in which Powell struck a more cautious tone, nothing how the economy is no longer 'overheated' and that the jobs market is 'fully' back in balance," he added.

"The door to a September cut was already ajar prior to today's data, with these figures forcing said door open a touch further," Brown said. "Providing inflation continues to behave itself, and cracks continue to appear in the labour market, the first 25bp cut seems likely at the next-but-one FOMC decision, probably followed by a further such cut in December."