Financial Markets Weekly Recap: US Labour Data Attracted Most Investors’ Attention

The US labour market was a significant focus for investors, with the August nonfarm jobs repor as the most awaited data. The report confirmed signs of a softening US labour market, starring a drop in the unemployment rate from 4.3% to 4.2% by a clear softening trend in new jobs added and several downward revisions. Markets continued a selloff that began in the seasonally volatile September, with the S&P 500 down about 4% from recent highs and the Canadian TSX down about 3%.

Job growth and wage growth in the United States increased in August, according to the US Bureau of Labour Statistics’ latest jobs report. The US Nonfarm Payrolls increased by 142,000 jobs in August, compared to the previous month’s reading of 89,000. However, this represents an increase, it fell short of market expectations of 160,000 jobs. Wage growth has increased, as evidenced by the US average hourly earnings index, which showed both monthly and annual increases.

Central Bank Reactions

Markets now turn their attention to the path of the central banks in both the US and Canada, and how recent softer labour market data, combined with softer inflation readings, could potentially influence looming interest rate cuts. While the Fed is believed to begin its rate-cutting cycle Sept. 18 with a 0.25% rate cut, the probability of a 0.50% rate cut has increased, given the recent softening economic data.

In Canada, the Bank of Canada (BoC) has already cut interest rates three times this year, bringing the policy rate down to 4.25%. Given recent softness in Canadian economic growth, we believe the BoC will likely cut rates two more times this year, bringing its benchmark rate closer to 3.75%.

Markets have had a strong run this year through the end of August, with the S&P 500 up about 18% and the Canadian TSX up 9% during that time frame. Markets are now entering a seasonally choppy period for markets in September and October, followed by US elections on Nov. 5. Given the uncertainty in the economic (and political) environment, we could perhaps see a correction in markets materialize in the typical 5% to 10%+ range in the weeks ahead.

Since the beginning of September, markets have taken on a risk-off tone due to rising uncertainty in the labour market and economic data. This has led to more defensive posturing across various financial markets, including stock markets, bond markets, and commodities markets. Government bond yields have moved lower in response to weaker labor market data and the potential for central bank rate cuts.

Oil Performance

Crude oil prices hit new lows of the year: The S&P Global Commodity index has also hit new lows of the year, driven in part by WTI crude oil prices, which are now around $68 per barrel. The selloff in oil and commodities also reflects the fears of a demand slowdown globally, particularly in the Chinese market, which has been plagued with softening consumer and economic growth.

The dynamics of US crude oil inventories have an impact on oil prices, and the market is still cautious because of worries about future demand levels, particularly from China and the US. In an attempt to constrain global supply and maintain prices, the OPEC+ coalition has announced a postponement of the output increases scheduled for October and November. However, the efficacy of this move is still unknown. The persistent unpredictability surrounding the state of the world economy, especially in China and the United States, continues to affect the demand for oil and could result in lower gasoline costs and usage. The market’s pessimistic outlook has been further reinforced by the recent rise in gasoline stocks in the United States, which raises the possibility of an oil glut in the upcoming months. The future trajectory of oil prices is highly dependent on factors such as global economic growth, geopolitical developments, and the effectiveness of OPEC+ policies.

Gold Performance

Gold prices have surged to new heights, reaching above $2,500 per ounce, driven by growing expectations of a potential Fed rate cut. Economic indicators, such as mixed job data and slight improvement in services activity, have strengthened the case for a rate cut. Fed officials have hinted at easing monetary policy to maintain a healthy labor market. The anticipation of lower interest rates has led to a decline in U.S. Treasury yields and a weaker U.S. dollar, both supportive factors for gold prices. Traders are positioning themselves ahead of the crucial August Nonfarm Payrolls (NFP) report, which could provide further clues about the Fed’s future policy decisions. From a technical perspective, gold prices appear to be in a strong uptrend, with the Relative Strength Index (RSI) suggesting buying momentum is gaining traction. A break above the year-to-date high of $2,531 could lead to further gains.

Gold prices have retreated from a record high of $2,531 per ounce, ending below the psychological $2,500 per ounce mark. The mixed set of US job data released last week has cast doubt on the US Fed rate cut hopes, dragging the gold price worldwide. However, experts suggest that a US Fed rate cut would enable the central bank to keep the US job market balanced and suggest that US Fed Chairman Jerome Powell stick with the rate cut decision in the upcoming US Fed meeting. Gold prices retreated from near-record highs in the international market towards the end of the week following the release of key US payroll data. The mixed jobs report, a critical measure of labor market health, reduced the likelihood of a large 50 bps rate cut by the Fed, strengthening the dollar and pressuring gold prices.

Eurozone, GBP/EUR

The latest figures from Eurostat show that the Eurozone economy grew slightly less than initially reported in the second quarter of this year. The revised data indicates that the economy expanded by 0.2% between April and June, down from the previous estimate of 0.3%. This is also slightly lower than the 0.3% growth rate recorded for the 27-country European Union. Analysts had predicted the Eurozone economy to grow by 0.2% before the initial estimate was released.

The Pound Sterling’s value against the euro has been relatively stable since the Brexit referendum in 2016, compared to its lows in 2008 and prior to the referendum. While it has weakened since 2016, it hasn’t reached the same depths as in those earlier periods. This decline has affected both British tourists and domestic consumers, as rising inflation rates have led to increased prices for imported goods.

In addition to the euro, the pound has also weakened against the US dollar since the referendum. The exchange rate between the two currencies has fallen significantly from its pre-referendum level.

Crypto:

Bitcoin’s recent price surge has stalled, encountering resistance at key technical levels. After recovering from its August lows and reaching a high of nearly $65,000, Bitcoin has faced resistance from the 100-day and 200-day moving averages. This week, a bearish reversal pattern formed, indicating a potential shift in market sentiment. The price has now fallen below the crucial $57,000 support level, suggesting that sellers are gaining momentum and that the bullish trend may be weakening.

Next Week’s Outlook

The upcoming week will be filled with important economic data and corporate events. Key events to watch include:

Inflation Data: The Consumer Price Index (CPI) will provide insights into inflation trends.

Apple Product Launch: Apple is expected to unveil its new iPhone 16.

Corporate Earnings: GameStop, Oracle, Adobe, and Kroger will report earnings.

Goldman Sachs Technology Conference: Several tech companies will participate in this industry event.

These events will likely influence market sentiment and provide further clues about the direction of the economy. Investors should closely monitor these developments to make informed decisions.

Over the next two weeks, investors will also digest the last set of consumer price index (CPI) inflation readings in both the US and Canada. In the US, the expectation is for headline CPI inflation to continue to moderate, down from 2.9% year over year to 2.6% this month, making further progress toward the Fed’s 2.0% target. In Canada, forecasts call for CPI inflation to moderate to 2.1%, down from 2.5% last month. Over time, the combination of easing inflationary pressures and lower interest rates could support a reacceleration of consumer and corporate spending.

Last Updated on 3 months by News Desk 1