Last Friday’s NFP release all but confirmed that we are getting a rate cut during next week’s FOMC meeting. 75 thousand new jobs were expected in August, but the latest report revealed that the actual figure was in fact only 22 thousand. Before the latest jobs numbers, interest rate traders were already leaning heavily in favour of a 25-bps cut, but after Friday’s data drop, market participants are now entertaining the possibility that the Fed will commit to a stronger move and slash rates by a full 50-bps instead. Whatever the size of the cut, monetary easing is around the corner.
Despite the abysmal employment figures, the reaction in US stocks was relatively muted. The S&P 500 and Dow Jones lost modest amounts while the Nasdaq ended the day almost flat. The Dollar lost around half a percent against major currencies but once again, nothing significant. Precious metals hosted the bulk of the drama last Friday, which saw gold briefly reach up to a record-breaking $3,600 per ounce. The metal opened high this morning and is currently deliberating on its next course of action. The move into gold is a global phenomenon, fuelled by rate cut expectations on the Dollar, but perhaps more generally by a growing sense of uncertainty within financial circles. Countries around the world continue to stockpile precious metals, with the Chinese central bank adding to its reserves for the tenth consecutive month.
There may yet be some twists and turns in the road before next week’s interest rate decision. The first arrives tomorrow in the form of the non-farm payrolls annual revision, a more comprehensive data set which includes tax records and is considered more accurate than the usual monthly reports. Last year’s revision slashed 818 thousand jobs from the annual figure, from 2.9 million jobs initially – a 30% correction. A similarly significant report tomorrow may paint a different picture of the US labour market entirely. Things complicate further on Wednesday with August PPI figures and again on Thursday with the latest batch of CPI data. The two reports will provide the newest information about inflationary pressures in the US and may factor into the Fed’s next move. A poor labour market coupled with higher inflation is not a situation any country wants to be in and leaves the central bank with difficult decisions to make. In Europe meanwhile, the ECB is expected to maintain rates steady on the Euro at 2.15% on Thursday.
Geopolitical events could provide some entertainment in financial markets this week as France’s Prime Minister faces a confidence vote later today which he is fully expected to lose. The French economy boasts one of the highest debt-to-GDP ratios in the world and yields on French bonds continue to rise. The Japanese Prime Minister meanwhile resigned yesterday, potentially paving the way for an advocate of greater looser fiscal policy to take up the mantle. Either way the path forward for the Bank of Japan remains a complicated one.
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