Weak NFP Could Prompt 50bps Fed Cut

After a downward half this week, the upcoming nonfarm payroll report could influence expectations for additional Federal Reserve interest rate cuts in September.

A Bad Start to the Month

Stocks started the week lower due to concerns about the economy. The S&P 500 fell over 2% while the Nasdaq dropped more than 3%, weighed down in part by weakness in AI after an antitrust action was announced against Nvidia. This added to worries over the health of the economy and increased bets that the Fed will cut rates by 50 basis points in September, up from an earlier expectation of 25 basis points. The majority expecting only 25 basis points of easing fell from 62% to just 55%, as investors increasingly expect the Fed to take more aggressive action in light of softer ISM manufacturing and JOLTs data this week.

Speculation of a larger rate cut could be reinforced by the NFP data, which is forecast to show only a modest increase of 120000 jobs added in August. This would be a slight improvement over the surprise 114000 reported for July, although prior months are subject to revision. The unemployment rate is projected to remain at 4.3% as job openings have reportedly declined rather than more people entering the workforce. Average hourly earnings are also expected to be unchanged at an annual growth rate of 3.6%, consistent with Fed Chair Jerome Powell's recent comments about the labour market achieving balance.​

Potential Market Reaction

Some argue that the Fed should make a larger interest rate cut in September, pointing to labour market data showing that the focus has shifted from inflation to employment. Inflation is expected to reach the target soon, so the Fed is now concentrating on fully employing the workforce as the second part of its mandate.

Citi expects a slightly higher job creation number of 125000 than the market consensus. However, Citi still argues for a more dovish outlook, though it acknowledges an unemployment rate decline could allow the Fed to cut rates by 0.25%. That assumes last month's low job creation figure is part of a downward trend. In contrast, the majority still favour less easing, which implies the July result was a "one-off," and employment data on Friday could show signs of recovery.

Some analysts blame negative results from the prior month partly on bad weather but expect bond prices to recover after the upcoming jobs report. Despite stock market weakness since the start of the month, analysts suggest the market remains more optimistic about interest rate reductions than concerned about an overly large cut risking recession. This implies that too-strong employment data could reduce anticipated rate cuts and hurt stock prices.

Gold prices likely depend on whether a recession and subsequent haven demand strengthens or more positive numbers disappoint expectations of significant rate cuts and cause bond yields to rise instead.​

Gold Has More Room to Go

The price of gold has reached record levels following the completion of a triangle pattern at $2300 per ounce, extending to $2570. Prices are yet to reach the projected measured-move estimated price of $2640. However, weakness in the upcoming NFP figures could bolster bullish sentiment, supporting higher gold prices. Conversely, disappointing jobs risk prompting a fall through $2500 and $2400 per ounce, potentially retesting the triangle low.​

Source: SpreadEx / Gold, Dec

Key Takeaways

The upcoming NFP report could influence expectations for further Fed rate cuts in September. A weaker-than-expected jobs report may reinforce speculation of a larger 50 basis points cut, whereas stronger data could reduce anticipated cuts and cause bond yields to rise. The report is forecast to show a modest increase in jobs and steady unemployment, but some argue more aggressive easing is needed, given signs of softening economic data and employment trends. Market reaction will depend on whether the data signals greater recession risk and haven demand or reduces expectations of substantial rate reductions.​