Spot gold is testing support at $1,300 in the midst of the latest data from the Commerce Department which shows that Personal Consumption Expenditure rose above expectations in December, although the annual core-PCE remained flat.

Key Takeaways

• Annual core-PCE (excluding volatile food and energy prices) remained the same in December with no change.
• However, the core-PCE rose 0.2% in December on a monthly basis, which is a short-term indication for some mild inflation pressure.
• Personal income rose 1% in December and dropped -0.1% in January, the first drop in three years.

Consumer spending dropped in December, lending credence to expectations of a dip in Q1 2019 GDP as analysts predict lower growth trajectories at the opening of this year following the impact of the US government shutdown as well as trade protectionism policies impacting performance in manufacturing and other areas.

The monthly rise in core-PCE at 0.2% was close to November’s 0.1% rise and is not being taken as a major inflation pressure indicator, particularly with the annual figure remaining flat. The data supports the outlook that the Fed can and should hold off on further rate hikes until more serious inflation pressure presents itself.

At 1.9%, the annual core-PCE, which is the Fed’s preferred measure of inflation, is just shy of its 2% target which was hit for the first time in March since April 2012. With a strong labor market and Fed officials tentatively stating that the economy is performing well overall in recent months, the central bank seems to be making progress in its goals to manage inflation while keeping the rate of unemployment down, although some analysts believe the central bank should be doing more.

Today's Commerce Department data show PCE inflation at 1.7% in 2018, core PCE at 1.9% (excluding food and energy.) If keeping track, Fed has been under 2% target for 7 years in a row. https://t.co/AxUI3gFDW2 pic.twitter.com/xD6UgaLyeJ

— Steve Matthews (@SteveMatthews12) March 1, 2019

Fed Remains Flexible on Policy

Recently Fed officials even stated that the economy was in a state healthy enough that they could afford to step back and monitor the effects of central bank policies in order to inform future policies in more turbulent times. Such times may yet be on the way with the risk of recession rising according to a recent Reuters poll as well as Brexit looming and a trade war with no certain end in sight.

Fed Chairman Jerome Powell has assured a Senate Committee that the central bank is prepared to readjust its policy towards allowing the Fed’s formidable balance sheet to run off without replacing mature assets, assuaging fears that the monthly $50 billion runoff would cause unwanted effects in the financial markets.

Market Reaction

Gold is trading down -0.57% at the time of writing following a downward trend started earlier in the day, with little reaction seen following the release of the tame inflation report and personal income data.

Spot gold is trading at $1,305.28/oz with a high of $1,315.25/oz and a low of $1,304.48/oz, testing support at $1,300 and hovering near a two-week low. Lower risk aversion sentiment in the financial markets and a stronger US dollar are likely behind the bulk of today’s selling pressure.