Non-farm payrolls blur rate cut outlook, dollar rebound sends gold price below $2500, US CPI this week

Early Monday morning (September 9th) in the Asian market, spot gold fluctuated narrowly, currently trading around $2496.47 per ounce. Gold prices fell after surging on Friday, as non-farm payroll additions were lower than expected, with gold prices briefly hitting a near three-week high of around $2529.06 per ounce, nearing a record high, but quickly giving up gains as the unemployment rate fell and the Fed's 'third-in-command' did not signal a 50-basis-point rate cut, causing the market to doubt the magnitude of the Fed's rate cut later this month.

The US Department of Labor reported that non-farm payrolls increased by 142,000 in August, compared to economists' expectations of 160,000. The July increase was revised down to 89,000. However, the unemployment rate was 4.2%, in line with expectations and lower than the 4.3% of the previous month.

Aakash Doshi, head of North American commodities research at Citi, said that gold paper traders are debating whether the Fed will cut rates by 50 basis points or 25 basis points on September 18, and gold prices are reacting accordingly.

"The labor market is cooling in an orderly fashion," said Jeffrey Roach, chief economist at LPL Financial. "Businesses are still adding jobs, but not as blindly as before. The Fed may cut rates by 25 basis points and retain room to act more aggressively at the last two meetings of the year."

The lower-than-expected August job growth, in addition to fewer job openings indicating weakening demand, may also reflect a seasonal quirk: August job growth often initially falls short of consensus expectations and is later revised upward.

In the past 13 years, the initial August job growth figures have been revised upward in 10 years. Goldman Sachs economists pointed out that in industries where the initially reported figures are usually negative, August job growth was 42,000 less than the six-month average, "suggesting that the data released on September 6 may underestimate the actual job growth for the month."

The proportion of industries reporting job growth increased from 47.8% in July to 53.2%. Average hourly earnings rose 0.4% in August, following a 0.2% increase in July. Year-on-year wage growth was 3.8%, compared to 3.6% in July.

According to the CME FedWatch Tool, traders currently see a 71% chance of a 25-basis-point rate cut this month and a 29% chance of a 50-basis-point rate cut. Before the non-farm payroll data, the market had expected a 47% probability of a 50-basis-point rate cut by the Fed in September. After the non-farm payroll data, the market's expectation of a 50-basis-point rate cut by the Fed in September rose above 50%, but then quickly fell back.

Federal Reserve's "third-in-command," New York Fed President Williams, said on Friday that a more balanced economy has opened the door to rate cuts, but the full path of rate cuts will be determined by economic performance.

"The economy is now in balance, and inflation is moving toward 2%, so it is appropriate to reduce the restrictiveness of the policy stance by lowering the target range for the federal funds rate," Williams said in a speech at a meeting of the Council on Foreign Relations in New York. "Over time, the stance of monetary policy can shift to a more neutral one, depending on the data, the outlook, and the risks to achieving our goals."

But Williams declined to comment on the specifics of the pace and magnitude of the upcoming easing, and the size of the first rate cut later this month, telling reporters, "I personally have no opinion on that at the moment."

Williams said vaguely: "Clearly, we need to get interest rates back to a more normal level over time. The problem with that statement is that I'm not sure what a more normal level is, nor am I sure how long that will take."

The dollar rose on Friday in volatile trading, briefly hitting a more than one-week low of 100.55, but then reversed course to rise slightly, reaching a high of 101.40 and closing at 101.18, up about 0.13%. Data showed that US job growth in August was lower than expected, but indicated that the labor market was only slowing steadily, which may support a gradual rate cut by the Fed.

Gennadiy Goldberg, head of US interest rate strategy at TD Securities, said: "I think the market is really wrestling with this report because it really can be used as an argument for both a 25-basis-point cut and a 50-basis-point cut."

Karl Schamotta, chief market strategist at Toronto-based payments company Corpay, said: "The US economy seems more likely to derail in the coming months, which justifies an increasingly aggressive response from Fed officials."

He said: "The probability of a 50-basis-point rate cut at the Fed's September meeting remains low, but the data released on September 6 provides clear evidence of a sharp deterioration in labor market fundamentals and will strengthen bets on at least one large rate cut in the coming months."

Federal Reserve Governor Waller said on Friday that the "time has come" to begin a series of rate cuts, but she remained open to the size and pace of the cuts.

"If the data supports rate cuts at consecutive meetings, then I think it would be appropriate to cut rates at consecutive meetings," Waller said in a prepared speech for the University of Notre Dame. "If the data suggests that a larger rate cut is necessary, then I would also support that. When inflation accelerated in 2022, I strongly advocated for raising interest rates in a front-loaded manner, and I would also advocate for a front-loaded approach to rate cuts if appropriate."

Waller's tone was stronger, suggesting he was willing to cut rates by 50 basis points at the outset. He said the data showed the economy was softening rather than deteriorating, and did not appear to be heading for a recession, but "as the Fed's policy focus shifts from inflation priority to maintaining full employment, the current set of data suggests that patience is no longer needed, but action is."

Waller said that while the rate cuts the Fed will begin at its next meeting "will be cautious, with continued economic and employment growth, but as inflation stabilizes, I am ready to act quickly to support the economy if necessary."

Affected by the decline in non-farm payroll additions and Waller's speech, the US 10-year Treasury yield fell on Friday, briefly hitting a 15-month low in volatile trading, which still provided some support for gold prices.

The US 10-year Treasury yield fell 2.5 basis points at the end of Friday's trading, closing at 3.708%, hitting a low of 3.648% during the session, the lowest since June 2023.

The two-year Treasury yield fell 10.6 basis points on Friday, closing at 3.646%, with an intraday low of 3.595%, the lowest since March 2023.

"The jobs report suggests the Fed has no reason to rush," said Drew Matus, chief market strategist at MetLife Investment Management. "The labor market is slowing, but at a slow pace, allowing the Fed to take a more cautious approach in September."

However, some details from Friday's report, including a downward revision of 86,000 in job growth over the past two months, may be a warning sign, suggesting that the labor market is not as healthy as hoped.

Goldberg of TD Securities said: "We do believe that the labor market is not only not moving toward balance, but is starting to cool significantly, which could make the Fed quite nervous."

This week will see the release of the US August CPI data, and investors need to pay close attention to the data performance and changes in market expectations.

US overall CPI fell to 2.9% year-on-year in July, and the market expects it to fall again to 2.6% in August. However, core inflation is expected to remain unchanged at 3.2%, the lowest level since May 2021. If this data is confirmed, the Fed is more likely to adopt a 25 basis point "dovish rate cut." But for a 50 basis point rate cut to become a realistic possibility, a significant downside surprise must occur.

This week will also see the European Central Bank's interest rate decision, which investors also need to pay attention to. The vast majority of economists expect the ECB's September 12 meeting to cut interest rates by 25 basis points and again in December. This could provide some support for gold prices, as rate cuts reduce the opportunity cost of holding gold.

Sources close to the European Central Bank's discussions said that policymakers are divided between inflationary pressures and weak economic growth and potential recession.

Luca Mezzomo, head of macroeconomic analysis at Italy's Intesa Sanpaolo Bank, said: "The recent slowdown in wages and economic activity has increased the likelihood of a rate cut."

On this trading day, it is necessary to pay attention to China's August CPI data and the US August New York Fed's 1-year inflation expectations.