After last week’s disappointing jobs numbers from the US, the market has gone ahead and priced in a lot more easing from the Fed. But, that assumes that inflation will be in line with expectations. A surprise in the upcoming US CPI and even PPI figures could change the market’s calculus about rate cuts. That could provide a substantial swing to the dollar and gold.
Friday’s NFP was dismal, and left traders with the distinct impression that the US might be heading to a marked slowdown if not an outright recession. The headline NFP number was just 22K, instead of the 75K that was forecast. To make matters worse, June’s reading was revised lower to -13K, the first negative read since the pandemic. Gold prices jumped to record highs, but the dollar actually gained as safe haven flows started to assert themselves.
Going Beyond the Headlines
There’s no sugarcoating the jobs numbers, but it is notable that the unemployment rate tick up only one decimal to 4.3% from 4.2%. That matched expectations, and came accompanied by a similar rise in the participation rate. In other words, the labor “tightness” hardly changed, despite the poor topline job creation numbers.
The difference between these two figures is important, given how they reflect two different sets of data. NFP is calculated based on how many people companies report working for them. The unemployment rate is calculated based on how many people report getting unemployment benefits and seeking employment. In other words, migrants working the country illegal can be counted in the NFP number, but are very unlikely to show up in the unemployment rate. The US had net negative migration in June. If fewere foreigners are employed, it would pull down the NFP figure, but not affect the unemployment rate all that much.
What About the Rate Cut?
The Fed cares about maintaining full employment, as measured by the number of legal residents seeking work. While the NFP provides helpful insight, it’s the unemployment rate that matters for setting monetary policy. If the Fed believes that the labor market is loosening, then it will also loosen policy. But, regardless of what happens with the NFP, if the Fed believes that the unemployment rate still hasn’t risen enough to start to worry about its full employment mandate, then it won’t be inclined to cut rates.
Markets are pricing in a 100% chance of a rate cut on September 17, with a even a 10% chance of a “double” cut of 50 bps. The market is also pricing in an 80% chance the Fed will cut rates at each of the three remaining meetings of the year. What could pull those expectations back is if the upcoming inflation data shows that price pressure from tariffs is increasing.
What to Look Out For
First up is PPI on Wednesday, which is expected to stay unchanged at 3.3%. Remember that last month’s reading was way above expectations, and left the market worried that there were underlying inflation pressures. A miss here could leave the market even more convinced that the Fed will cut rates.
On Thursday is the release of US August CPI which is expected to decelerat to 2.7% from 2.9%. But the Fed pays more attention to the core rate, which is projected to remain unchanged at 3.1%. If inflation is higher than forecast, the market could pare back some of its easing bets, shoring up the dollar and dragging on gold. But if there is a substantial miss, the lower inflation could convince the market that even more easing is coming, potentially pushing gold to new highs.
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