The next few trading days are likely to see further adjustments following last week’s U.S. non-farm payrolls data. The jobs report showed the U.S. added a very respectable 224,000 jobs in June while the unemployment rate edged up to 3.7 percent. Wage growth remained at 3.1 percent.
The solid jobs report sent market expectations for a 50-basis point rate cut in July sharply lower, and markets are now pricing in less than a five percent chance of a half-point cut later this month. Markets are still pricing in a strong likelihood of a 25-basis point cut, however, and may simply have gotten ahead of themselves.
Jobs growth has declined on a three-month rolling basis; however, the amount of jobs being added is significant and could keep the Fed on hold. Despite market expectations for a July cut, the central bank could potentially elect to hold off, possibly until its September meeting.
Of course, the Fed has more than just domestic economic data to consider. The ongoing U.S./China trade war is having a significant impact on the economies of both countries, and any further escalation of tensions with Iran also has the potential to affect the oil and financial markets.
The question does not seem to be “if” the Fed will cut, but rather “when” and how aggressively. Fed Chief Jerome Powell will be testifying this week before Congress, and the markets will be looking for any potential clues about the central bank’s plans. Given the strong employment data, Powell could potentially surprise markets by suggesting that a July rate cut may be premature.
The latest FOMC meeting minutes are also set for release on Wednesday but may be largely considered “old news” before Powell speaks to Congress on Thursday and Friday.
The latest reading of the Consumer Price Index will also be released on Thursday. Estimates are currently for no change on the headline figure and a .2 percent rise on the core reading which excludes volatile food and energy prices. Inflation has remained stubbornly below the Fed’s desired 2 percent annual target, and a lower reading may give the Fed continued wiggle room with regards to rates.
The dollar saw a bit of upside following the jobs data but has not been able to make any significant upside headway in recent weeks. The currency may start to come under increasing pressure, however, as the effects of tax cuts and government spending fade further and as the Fed gets ready to embark on a series of rate cuts.
Despite the recent dip in gold prices, the market appears to be on solid fundamental and technical footing. Some further downside pressure could be seen this week as markets continue to react to the strong jobs data, but the market may begin to firm up again quickly as investors step in to buy the dip. Although Powell’s testimony before Congress later in the week could throw the market a curveball, the central bank may be forced to cut rates aggressively in the months ahead as the global economy slows further. Market expectations for easing and a potential topping process in stocks may keep gold on the offensive in the months ahead.