Weekly Outlook: The "big battle" of the Fed's September rate cut is coming! Are the gold bulls ready to ambush and buy the dip?

The most important data this week is the US non-farm payroll data, but it still does not clearly indicate whether the Fed will cut interest rates by 25 basis points or 50 basis points at the meeting on September 18th. Despite the lower-than-expected number of new jobs, some contents in this report are enough to keep the market vigilant for a while.

In August, the number of non-farm employment increased by 142,000. In addition, the employment numbers for the previous two months were revised down by 86,000. It is worth noting that this pattern of downward revisions to previous values has been ongoing. These revisions indicate that the US Bureau of Labor Statistics overestimated the number of non-farm employment every month before March 2024, overestimating by an average of 78,000 people per month.

As for the market performance this week, the US stock market continued the downward trend from September, as indicated by historical seasonality. Major indices on Wall Street all fell this week, with the Nasdaq down by about 5.6%, the S&P 500 down by 4%, and the Dow Jones down by about 2.84%.

This decline is reflected in the outflow of funds from US stock funds, with the largest single-week outflow in 12 weeks as of September 4th. This is consistent with increasing concerns about the health of the global economy. According to data from LSEG, investors net sold $11.37 billion worth of US stock funds this week, marking the fourth consecutive week of outflows in five weeks.

Oil prices also fell due to economic concerns. Despite news that OPEC+ will postpone its planned production increase scheduled to start in October, it was not enough to reverse the selling pressure. This has left oil prices in an unstable position as the new week begins.

Despite recession concerns, gold prices have not broken through historical highs, which may be partly attributed to market participants already pricing in a significant amount of rate cut expectations. The reaction of the US dollar index was similar, strengthening after the employment data was released and closing higher this week.

Market expectations for a Fed rate cut have also fluctuated significantly. After the data was released, the market expected a 65% chance of a 50 basis point rate cut in September. However, with the passage of time and statements from several key Fed officials, rate cut expectations have significantly adjusted. The latest market pricing now indicates a 75% chance of a 25 basis point rate cut by the Fed in September.

Next week, the US will release CPI data for August, which will be the "final piece of the puzzle" before the Fed's September interest rate meeting, determining whether the central bank will cut rates by 50 basis points this month. In addition, the European Central Bank may cut rates for the second time, and the UK will also release various economic data...

Here are the key points that the market will focus on in the new week (all in Beijing time):

Central Bank News:

Federal Reserve Enters "Quiet Period"

Currently, the Federal Reserve has entered its regular "quiet period". Before the official "closure", two senior Federal Reserve officials hinted that despite the mixed feelings in the employment report released on Friday, the Federal Reserve may still cut interest rates by half a percentage point at the upcoming meeting. However, they also indicated that the Federal Reserve will proceed with caution when taking action.

Federal Reserve Governor Wall and New York Fed President Williams stated on Friday that due to declining inflation and a weak U.S. labor market, multiple rate cuts should be made this year.

Wall stated that given the increased "downside risks", the current economic situation "requires action from the Federal Reserve" to avoid unnecessary damage to the labor market. He mentioned that the labor market remains weak, but "has not deteriorated".

Wall emphasized that the economy is "performing well" with "good" prospects for sustained growth, and added that he expects the Federal Reserve to "cut rates cautiously". In a discussion, he mentioned that the latest employment report did not cause panic but indicated a return of economic growth to a more "normal" level.

However, he hinted that he would be willing to take more aggressive rate-cutting measures if necessary. "If the data suggests the need for a larger rate cut, then I would support doing so," he said.

The Fed funds futures market experienced significant fluctuations on Friday, with some traders believing that the Fed is more likely to cut rates by 50 basis points this month. However, these bets were later reduced, but traders still expect the central bank to cut rates by more than one percentage point this year, indicating that the Fed may need to intensify its efforts to address economic slowdown.

Williams also suggested that the Federal Reserve will react to the latest data as needed, but he emphasized that the economy remains on a solid footing, and monetary policy is "in a good position" to maintain this situation.

"The market is overly concerned about a recession, and this report shows no signs of a recession occurring," said Torsten Slok, Chief Economist at Apollo Global Management. "When the unemployment rate falls, there is no need to cut rates by 50 basis points."

Federal Reserve officials are closely monitoring signs of weakness in the labor market as they try to bring the inflation rate down to the Fed's 2% target. The core PCE price index, which excludes volatile food and energy prices, was at 2.6% in August, peaking above 5% in 2022.

Data from the U.S. Bureau of Labor Statistics shows that job growth in August was consistent with the average growth rate in recent months but lower than the monthly average of 202,000 jobs added over the past 12 months. The construction and healthcare industries performed strongly, while manufacturing positions decreased.

Overall, job growth in June and July was 86,000 lower than previously reported, intensifying concerns that the labor market may be losing momentum earlier than expected. Average hourly earnings increased by 0.4% in the month, up 3.8% year-on-year Williamson predicts that the unemployment rate will stabilize around 4.25% this year, while economic growth will reach as high as 2.5%, indicating that he is not worried about the upcoming recession.

Tom Porcelli, Chief U.S. Economist at PGIM's Fixed Income Division, expects the Fed not to cut interest rates by 50 basis points this month, but he says that the data supports multiple rate cuts, highlighting different views on the economic outlook.

"If you are waiting for the most lagging data in economic indicators - non-farm payrolls - to provide evidence, then you are already late," he said.

Former New York Fed President Dudley expressed concerns in an interview on Friday that the Fed's actions may be too slow, having previously called for a rate cut in July. He mentioned that both a recession and a soft landing are "possible".

Other Central Banks:

Thursday 20:15, the European Central Bank announces interest rate decision

Thursday 20:45, ECB President Lagarde holds a monetary policy press conference

Earlier, the European Central Bank made a last-minute decision to cut rates at its June meeting, unsettling the markets. To enhance credibility, policymakers had only one choice - to proceed with the planned 25 basis point rate cut, but to label it as a "hawkish rate cut".

Fortunately, since the last meeting in July (when rates were unchanged), the case for further easing by the central bank has strengthened, which is good news for doves and struggling European businesses. In August, the eurozone core inflation rate fell to 2.2%, and economic growth in the eurozone remained lackluster.

The current economic backdrop may lay the foundation for the ECB to lower its quarterly inflation and GDP forecasts, which will be announced on the day of the Thursday meeting. More importantly, President Lagarde may now believe that she can downplay the emphasis on "data dependency and meeting-by-meeting assessment" and confidently hint at further rate cuts in the future.

However, there is a concern regarding the rise in the eurozone's service sector CPI in August, which rose to its highest level since October 2023, with a year-on-year increase of 4.2%. Although this is unlikely to deter the ECB from being more dovish at the September meeting, Lagarde may maintain caution at her press conference.

If the signal of the rate cut path from Lagarde is perceived as more gradual than expected by investors, the euro may resume its upward trend, as it has been impacted by a slight strengthening of the dollar.

According to reports from TD Securities, the European Central Bank may cut rates again at the meeting on September 12, followed by further rate cuts, but this is unlikely to have a substantial impact on the euro. TD Securities analysts said, "The ECB is unlikely to be a major or sustained driver of the euro against the dollar. Among all G10 central banks, the ECB's rate expectations seem to be the least likely to be mispriced, as policymakers' actions have been well communicated in advance."

Important Data: Will CPI Upset Fed Rate Cut Expectations Again? Gold Bulls Seem to be Lurking for Bottom Fishing

• Monday 07:50, Japan's revised actual GDP annualized quarterly rate for the second quarter, Japan's July trade balance
• Monday 09:30, China's CPI data for August
• Monday 16:00, China's M2 money supply annual rate for August
• Monday 16:30, Eurozone's Sentix investor confidence index for September
• Monday 22:00, US wholesale sales monthly rate for July
• Monday 23:00, US New York Fed 1-year inflation expectations for August
• Tuesday 10:00, China's trade balance for August
• Tuesday 10:50, China's trade balance in USD for August
• Tuesday 14:00, Germany's CPI data for August
• Tuesday 14:00, UK's three-month ILO unemployment rate for July, UK's unemployment rate for August, UK's unemployment claims for August
• Tuesday 18:00, US NFIB Small Business Confidence Index for August
• Wednesday 14:00, UK's three-month GDP monthly rate for July, UK's manufacturing output monthly rate for July, UK's seasonally adjusted goods trade balance for July, UK's industrial output monthly rate for July
• Wednesday 20:30, US CPI data for August
• Wednesday 22:30, US EIA crude oil inventories as of September 6
• Thursday 20:30, US initial jobless claims as of September 7, US PPI data for August
• Thursday 22:00, US ISM Non-Manufacturing PMI for August
• Friday 14:45, France's CPI data for August
• Friday 17:00, Eurozone's industrial output monthly rate for July
• Friday 20:30, Canada's wholesale sales monthly rate for July, US import price index monthly rate for August
• Friday 22:00, US 1-year inflation rate expectations for September, US University of Michigan Consumer Confidence Index preliminary value

In August, non-farm employment increased by 142,000. Additionally, employment figures for the previous two months were revised down by 86,000. It is worth noting that this pattern of downward revisions has been ongoing. These revisions indicate that the US Bureau of Labor Statistics overestimated the monthly non-farm employment figures for each month before March 2024, overestimating by an average of 78,000 people per month.

For example, June's employment growth was initially reported as 206,000, later adjusted to 179,000, and now stands at only 118,000. Similarly, July's employment figures were revised down from 114,000 to 89,000.

It seems that the apparent weakness in the labor market may finally be showing. Another factor that may concern the Federal Reserve is the increasing gap between full-time and part-time employment. This may be because most of the recent job additions in the US are low-paying or part-time positions, while high-paying and full-time positions are decreasing, mainly due to natural attrition, i.e., not replacing retiring or resigning employees Unfortunately, every economic recession starts this way. The easiest way to cut costs is to not replace employees, but if everyone does the same, the economy will slow down, and companies will eventually start actual layoffs.

Although officials, including Federal Reserve Chairman Powell, acknowledge cracks in the labor market and some officials have opened the door to a 50 basis point rate cut in September, most comments do not support the need for aggressive action as the data overall remains stable.

A major issue is, with the risk of rising inflation still present, how will the Federal Reserve prioritize its employment target over price stability? ISM's "prices paid" index for manufacturing and services both saw slight increases in August, with the former seeing a decrease in employment and the latter seeing only a slight increase in employment.

The August CPI report scheduled for next Wednesday will be the final piece of the puzzle before the September policy meeting. July CPI's year-on-year growth rate dropped to 2.9%, and it is expected to drop again to 2.6% in August. However, core CPI's year-on-year growth rate is expected to remain unchanged at 3.2%. Additionally, the U.S. will release PPI data on Thursday, and the University of Michigan will release the preliminary consumer confidence survey for September on Friday, which is also crucial, especially the 1-year and 5-year inflation expectations.

If the above figures are confirmed, the Federal Reserve is more likely to make a "dovish rate cut" of 25 basis points, and a significant negative surprise would be needed for a 50 basis point rate cut by the Federal Reserve.

Investors currently estimate a 40% chance of a 50 basis point rate cut by the Federal Reserve in September, so there is still room for adjustment in this expectation, if the CPI data is in line with or stronger than expected, the dollar may rise.

For gold, some Wall Street institutions have recently turned negative on gold. Phillip Streible, Chief Market Strategist at Blue Line Futures, is bearish on gold, but he added that the Federal Reserve's long-term easing cycle of multiple consecutive 25 basis point rate cuts will eventually push gold prices higher.

Adrian Day, President of Adrian Day Asset Management, said, "The latest report shows weaker-than-expected job growth in the U.S., intensifying excitement for the next Federal Reserve meeting (September 17-18) rate cut. Now, a rate cut is almost a sure thing. However, expectations for a significant rate cut may be too high, and the market may be disappointed."

Mark Leibovit, publisher of VR Metals/Resource Letter, believes that although he is bullish on gold in the long term, gold may experience a pullback in the near term. " Gold is still in a long-term bull market, but short-term sentiment is tense. A pullback of $200 to $300 is not impossible." Senior commodity strategist Daniel Ghali from TD Securities bluntly stated that the gold market is already overbought, and there is definitely risk in chasing higher prices. When asked at what price he plans to repurchase gold, Ghali stated that his target is for gold to drop significantly from its current level. He said:

"We believe that close to $2300 gold is reasonable relative to historical analogs we have discussed," he said. "Historically, moments of tight positioning like today have led to 7% to 10% drawdowns, so this seems reasonable to us."

Company Financial Reports:

The U.S. earnings season is coming to a close, with next week focusing on reports from companies such as Oracle and GameStop.

Weak economic data and cautious comments from Federal Reserve officials have sparked concerns among investors about a potential economic slowdown, leading to the worst week for the U.S. stock market in over a year.

The S&P 500 on Wall Street fell 1.7% on Friday, with a weekly decline of 4.2%, marking the most severe weekly drop since March 2023. Large-cap tech stocks were hit particularly hard, with the tech-heavy Nasdaq Composite seeing its largest weekly decline since January 2022, dropping 5.8%, including a 2.6% decline on Friday.

Tom Lee, the head of research at Fundstrat who accurately predicted the current uptrend in U.S. stocks, pointed out that due to a series of events challenging this year's stock market gains, the market may face a double-digit decline in the next eight weeks.

Lee, who has been a "perma-bull" on U.S. stocks, previously believed that the S&P 500 could double over the next decade, reaching 15,000 points by 2030. He now believes that U.S. stocks could fall by 7% to 10% and advises investors to prepare for heightened volatility. "I think investors should be cautious over the next eight weeks. The stock market has risen in seven out of eight months this year, so we know it's a very strong market. But we are approaching the September rate cut and the presidential election, which will make people nervous."

However, Lee also pointed out that the "challenging" weeks ahead should be seen as buying opportunities. He said:

"I think people will have the opportunity to enter the market in the next eight weeks. I think it's good to be cautious, but be prepared to buy on dips."

Market Closure Arrangements:

On Friday, due to the Mid-Autumn Festival holiday, domestic exchanges including the Shanghai Futures Exchange, Dalian Commodity Exchange, Zhengzhou Commodity Exchange, and Shanghai Gold Exchange will not conduct night trading