【MACRO Insight】The US January CPI inflation data will be released soon, and the market expects infla

The U.S. Bureau of Labor Statistics is about to release the unadjusted CPI annual rate/core CPI annual rate for January, as well as the seasonally adjusted CPI monthly rate/core CPI monthly rate for January. Market forecasts show that this report may show that inflation is still slightly high, which is partly due to rising prices of core goods (such as new and used cars). Economists expect that the overall CPI will rise by 0.3% month-on-month in January and the annual rate will remain at 2.9%; core inflation (excluding food and energy prices) will rise by 0.3% month-on-month and 3.1% year-on-year.

Trump's tariff threats have pushed gold prices to eight new highs this year and brought the $3,000 milestone into view. The market will closely watch this inflation data to determine whether the Fed's subsequent rate cuts will dampen the enthusiasm of bulls. Although inflation has fallen sharply from its peak in 2022, it has not returned to the Fed's target level. New policies of the Trump administration, such as tariffs, may increase inflationary pressures in the coming months.

Josh Hirt, senior U.S. economist at Vanguard Group, said he remains cautious about the inflation outlook. A higher base in early 2024 will make current data look milder, likely resulting in lower monthly inflation data in the first few months of this year. At the same time, monthly inflation appears to be returning to levels close to the Fed's target. However, new tariffs and still-fast wage growth could be factors that hinder inflation from falling.

As inflation remains sticky, market participants are gradually reducing expectations for a rate cut at the Fed's March meeting. The Fed kept the federal funds rate target range at 4.25%-4.50% in January after cutting rates by 1 percentage point cumulatively through 2024. The strong nonfarm payrolls data released last week further solidified the Fed's case for keeping interest rates unchanged in March.

According to data from the CME FedWatch tool, the market currently expects only an 8.5% probability that the Federal Reserve will cut interest rates by 25 basis points in March, down from 14% a week ago and 24% a month ago. Investors expect the probability of a rate cut at the June meeting to be about 43%. Some strategists even believe that the Fed may not cut interest rates at all this year. Fed Chairman Powell said that officials will be patient before further cutting interest rates because the economy remains strong. He also told Congress that it is unwise to speculate on tariff policy at this time.

At the start of the year, U.S. inflation showed little sign of declining momentum, while healthy job growth supported the economy, supporting the Fed's stance of keeping interest rates unchanged for now. Markets are awaiting inflation data to be released today, which will set the tone for the U.S. dollar index and the gold market. Traders have been betting on higher U.S. Treasury yields since last week's jobs report, and their beliefs will be tested as soon as Wednesday by the latest inflation data.

Open interest in U.S. Treasuries surged during trading sessions on Friday and Monday, suggesting new short positions were the dominant factor behind the weakness in Treasuries. On Tuesday, Treasuries extended losses, pushing the benchmark 10-year Treasury yield to 4.55%, after Federal Reserve Chairman Jerome Powell said there was “no rush to adjust our policy stance.”

According to market forecasts, Wednesday's CPI data may increase upward pressure on yields and reduce expectations for rate cuts. This may limit the short-term upside for gold. After soaring to a record high of $2,942 on Tuesday, gold prices fell due to some profit-taking, but the fundamentals remain very favorable.