Next week – PCE inflation in focus as Fed lays groundwork for September rate cut [Video]

• The focus should remain on the Fed, as PCE inflation will be the main highlight of the week.

• Inflation data from the eurozone is crucial for the ECB's hopes for an interest rate cut.

• Also on the agenda are the Australian and Tokyo consumer price indices and Canadian GDP.

Will PCE inflation disappoint dovish expectations?

The Fed's long-awaited dovish turn is imminent and markets are preparing for the first US rate cut of this cycle at the September 17-18 meeting. However, the Fed remains largely data-dependent and since the September decision also includes the updated dot plot, the interest rate path is far from set in stone.

The warmongering members of the FOMC still see some upside risks to inflation, and if the Fed is to cut rates by the 100 basis points priced in by the markets for 2024, the upcoming data will have to surprise significantly to the downside.

Therefore, the report on personal income and expenditure, which will be published on Friday and which includes consumption figures as well as the important price index for personal consumption expenditures (PCE), will once again be in focus.

The core PCE price index remained unchanged year-on-year at 2.6% in June and is expected to have remained at that level in July. The overall PCE is also expected to have remained stable at 2.5% year-on-year.

Private consumption is expected to have risen a whopping 0.5% month-on-month in July. While this could further ease recession fears, it could also dampen hopes for sharp interest rate cuts. However, a forecast increase in personal income of just 0.2% month-on-month could allay fears that American consumers will soon start spending again.

The dollar is heading for its fifth weekly loss against a basket of currencies, leaving it vulnerable to a rebound in the event of a more positive-than-expected report.

Auctions for government bonds and Nvidia profits in sight

Before the PCE reading, durable goods orders for July will be announced on Monday, followed by the consumer confidence index for August on Tuesday. Also, the second estimate of second-quarter GDP growth will be released on Thursday and the Chicago PMI on Friday.

There will be little to hear from the Fed, and investors will have to stick to the tone set by Chairman Powell in his Jackson Hole speech until data is released next Friday. However, a large number of Treasury auctions next week could add some volatility to bond markets as trading volumes recover from the summer lull.

However, on the stock markets, traders will also be looking at Nvidia's latest earnings figures, which will be released on Wednesday.

Last CPI report for the Eurozone before the next ECB meeting

The euro has gained strongly against the US dollar this month, trading above the $1.11 mark for the first time since December. The gains are possible despite strong expectations that the European Central Bank will cut interest rates again in September.

Although a rate cut in September is very likely, there is a small but significant risk that ECB policymakers will not be convinced by then that a further cut is needed. The preliminary CPI estimate for August on Friday will be crucial in giving the green light for further easing in September.

Inflation in the eurozone is expected to ease from 2.6% in July to 2.3% in August, moving significantly closer to the ECB's target of 2%. The core rate, which excludes all volatile items, is expected to fall slightly to 2.8% year-on-year.

A disappointment in inflation figures could further strengthen the euro against the greenback, although it would probably not change the market consensus for a rate cut in September.

Further publications from the Eurozone include the Ifo business climate test in Germany on Monday and the publication of the economic indicator for the Eurozone on Thursday.

Tokyo’s consumer price index is crucial for the BoJ’s decision on the next step

The yen, or more specifically the Bank of Japan, is partly to blame for the dollar's woes. The fact that years of ultra-loose monetary policy in Japan are coming to an end struck a chord with investors when the Bank of Japan simultaneously raised interest rates and announced the gradual halving of its asset purchases at its July meeting.