U.S. Manufacturing Data Fuels Concerns Amid Fed Rate Cut Speculation

As labor market data set to be released on Friday is awaited, bets on Federal Reserve (Fed) rate cuts continue to fluctuate.

The labor market data released last month fueled concerns of a potential U.S. recession and increased bets on Fed rate cuts. Indeed, Fed Chair Jerome Powell gave the first signal in his speech last week that the rate-cut cycle could begin in September. The key takeaway from Powell's speech was his clear indication that the Fed's focus is shifting from inflation to labor market risks.

Last week’s U.S. data showed that while inflation continues to decline, the economy is still growing strongly. Weekly labor market figures also remained in line with expectations. However, this data was insufficient for market participants to rule out the possibility of a 50-basis-point rate cut in one of the next three policy meetings.

On the other hand, data from the U.S. released yesterday showed that the manufacturing sector continues to contract, reigniting concerns of a recession. The Manufacturing Purchasing Managers' Index (PMI) came in at 47.2 in August, marking the fifth consecutive month of contraction. While this figure exceeded July’s 46.8, it remains in contraction territory. The New Orders Index also dropped to 44.6, the lowest level in 15 months.

Economists suggest that high borrowing costs and the uncertainty surrounding the upcoming presidential election are prompting U.S. companies to postpone capital spending and hiring.

Although Friday’s data is expected to show an upward recovery in payroll growth and a decrease in the unemployment rate, markets continue to price in the possibility of further economic contraction as long as interest rates remain high. Following yesterday’s data, the probability of a 50-basis-point rate cut in the September meeting rose from 30% to 41%. How data from the U.S. over the next two days will shape expectations remains critical.

Falling Yields Boost Gold's Outlook as Markets Eye Fed Rate Cuts

As U.S. Treasury yields decline, gold remains just below $2,500. The yield on the 2-year U.S. Treasury fell further to 3.85%, while the 10-year benchmark yield dropped to 3.82%. Both yields continue their downward trend from April's peak levels earlier this year. If the current trend in yields persists, it is expected to support the upward momentum for gold, which does not offer any yield.

In a report released earlier this week, Goldman Sachs maintained its forecast for gold prices at $2,700 by early 2025. This outlook is supported by expected rate cuts, uncertainties surrounding the U.S. elections, ongoing geopolitical risks, and strong central bank purchases.

As markets try to predict the extent of the Fed's rate cuts for the rest of the year, Friday’s data will be crucial in shaping expectations. If the data supports expectations for aggressive rate cuts, it could further strengthen the upward momentum for gold.

Yen Strengthens as BoJ Signals Continued Rate Hikes, Stock Market Faces Pressure

Bank of Japan (BoJ) Governor Kazuo Ueda reiterated in a presentation to a government panel yesterday that if the economy and prices align with the BoJ’s expectations, rate hikes will continue. The BoJ’s ongoing emphasis on its hawkish stance is supporting the Japanese yen against the U.S. dollar, with the yen continuing to rise towards the 145.000 level.

Economists surveyed by Bloomberg predict that the BoJ will deliver another rate hike by the end of the year, with 41% of participants indicating that December is the most likely time for this move.

On the other hand, as the yen strengthens, pressure is mounting on Japan’s export-oriented companies, and stocks continue to decline. The downward pressures are being influenced by the strong yen and expectations regarding the U.S. economy. Consequently, investors will closely monitor U.S. data for its impact on Japanese markets.