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Midweek Update: Key Developments and Market Insights [9th October 2024]

Fed Eyes Inflation Data After Labor Market Surpasses Expectations


Following last Friday's surprisingly strong U.S. jobs report, discussions continue regarding the Federal Reserve's policy path in the coming months. The U.S. economy added far more jobs in September than expected, and the unemployment rate declined. This eased concerns about the labor market and reduced pressure on the Fed.


Comments from Fed policymakers after last week's data emphasize that the inflation figures set to be released ahead of the next meeting will play a critical role in the decision. Therefore, Thursday's Consumer Price Index report will be closely watched for further clues.


The common theme in Fed officials' comments is that risks to the central bank’s employment and inflation targets are now seen as nearly balanced and that the approach moving forward should be gradual.


On the other hand, while Federal Reserve Governor Adriana Kugler supports a balanced approach to avoiding an undesirable slowdown in the labor market, she emphasized that the Fed must remain focused on bringing inflation back to its 2% target. Kugler stated that she would support further cuts if inflation continues to improve, but if progress stalls, the pace of rate cuts would need to be slowed.


The economic projections released after the Fed's September meeting had indicated a half-point rate cut for the remainder of the year. However, seven officials projected only a quarter-point cut in one of the two remaining meetings, while two opposed any further adjustments. Therefore, while the current outlook supports gradual rate cuts, upcoming data has the potential to alter the views of Fed officials.


Concerns are growing that if the economy continues to create more jobs and wage growth remains strong. Lower rates could stimulate consumer spending and potentially reverse the decline in inflation. For this reason, some Fed observers argue that the central bank should pause rate cuts until the delayed effects of the half-point cut are fully assessed.


Prior to the labor market data, expectations for the November meeting ranged between a half-point and quarter-point cut, but they now vary between a quarter-point cut and no change. While a quarter-point cut is seen as the main scenario, priced at 86.7%, bets that the Fed will make no adjustments have risen to 13.3%.


Headline CPI for September is expected to continue easing toward 2.3%, while core inflation is forecast to remain steady at 3.2%. If the data aligns with expectations, it is unlikely to shake the Fed’s confidence in the cooling inflation trend. However, any upward surprise in the figures could spark market expectations that the November rate cut will be skipped.



Gold Faces Pressure as Treasury Yields Rise, Geopolitics Lend Support


While expectations for smaller rate cuts from the Fed continue to be priced in, the rise in U.S. Treasury yields is increasing pressure on gold prices. Yields on the 2-year U.S. Treasuries climbed to 3.97%, while the 10-year benchmark yield jumped to 4.02%, the highest level since July.


Following last Friday’s U.S. jobs report, futures market data show traders abandoning long positions on U.S. Treasury-linked contracts and increasing short positions. According to a survey by JPMorgan Chase & Co., short positions have surged to their highest level since February 2023. Citigroup Inc. also reports a growing appetite for short positions ahead of this week’s inflation report.


Meanwhile, ongoing geopolitical tensions in the Middle East continue to limit the decline in gold prices. Markets remain tense as Israel’s response to Iran’s actions is awaited. Therefore, in a scenario where the inflation report does not deviate from expectations, the downside pressures on gold prices may remain limited.



Oil Markets React to Geopolitical Risks and Demand Concerns


Last week, oil prices spiked sharply amid concerns that Israel would retaliate by striking Iran’s oil facilities. However, the prices fell following reports that U.S. President Joe Biden had dissuaded Israel from targeting these facilities. Iran continues to export crude from its main Kharg Island terminal, but tensions in the market have not subsided, as Israel's response is still awaited. Futures market data shows that options remain skewed toward calls.


On the other hand, the lack of expected stimulus from China on Tuesday has raised questions about the recovery of demand from the world’s largest importer. As optimism regarding the Chinese economy fades, concerns over demand are putting downward pressure on oil prices.


While a weak Chinese economy and OPEC’s plans to increase supply are creating headwinds for the oil market, geopolitical developments could reverse this effect.

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