Market Mondays: Fed division deepens as markets weigh inflation, gold, and oil

Markets are entering a pivotal week dominated by expectations for US rate cuts, rising uncertainty around inflation, and continued divergences in global monetary policy. 

US jobs data sparks renewed debate on rate cuts

Weaker-than-expected US labour market data has prompted a shift in market expectations, with CME FedWatch now fully pricing in at least one 25bp cut in September, and a small probability of a 50bp cut. Despite the rise in the unemployment rate, several Fed officials, including Austan Goolsbee, remain cautious, preferring to wait for clearer signs that recent disinflation—particularly in services—is sustainable.

Markets are now anticipating more visible division within the FOMC, similar to the situation to the Bank of England’s previously split committee. Several Fed members—like Christopher Waller or Michelle Bowman—could lean more aggressively towards easing, especially if further jobs data revisions reveal continued softening.

Labour market trade-off becomes harder to ignore

Weakness in the labour US market has been present for months but is only now surfacing in headline data. With upcoming revisions to prior jobs numbers and rising unemployment, the Fed’s dual mandate faces increasing tension: support growth without allowing inflation to re-accelerate. As this trade-off intensifies, FOMC members are expected to diverge further in their policy preferences, creating more volatility in rate expectations.

Inflation data looms as key risk event this week

Attention now turns to the upcoming US CPI and PPI reports. While headline and core CPI are both expected to rise 0.3% month-on-month, there is growing concern about potential upside surprises. Hotter-than-expected inflation—particularly in services—could trigger renewed fears of stagflation and prompt a repricing of September rate cut expectations.

Even if some Fed members attribute higher inflation to temporary tariff-driven price level changes, others may argue that sticky services inflation signals a deeper problem. The result is likely to be further divergence within the Fed, and an increased risk of market volatility if the data upends the current easing narrative.

Gold rallies on macro headwinds, but breakout risk rises

Gold has reached record highs above $3,600, supported by a combination of rate cut expectations, central bank buying (including from China and India), de-dollarisation trends, and persistent geopolitical and fiscal risks. However, the metal could be entering a volatile regime, with sentiment stretched and positioning at extreme levels.

While the long-term fundamentals remain constructive, short-term pullbacks of $100 or more would not be surprising. On a technical basis, gold is now rated “bull average” on the weekly timeframe and “volatile” on the daily chart—suggesting breakout potential in either direction. With positioning data showing extreme long bias from both COT speculators and retail sentiment, gold could be prone to pull backs.

Stocks buoyed by policy hopes despite valuation concerns

Equity markets held relatively steady following US jobs data, with tech stocks outperforming despite higher valuations. The pullback in Treasury yields suggests markets are more concerned about growth than inflation, helping to support equities for now. Hypothetically, if the Fed does move toward sub-1% rates—as some in the political sphere advocate—then even currently expensive stocks and bonds may appear more attractive on a relative basis.

Weekly flows data also showed limited evidence of investor flight from risk assets, with many institutional investors still holding large cash reserves from the pandemic era. While some hedging activity is evident, the broad investor base appears to be maintaining exposure to equities.

Oil pressured by supply signals and weak demand outlook

Oil prices remain under pressure amid signs that OPEC may increase production in October. This suggests that key producers may now be prioritising market share over price, reinforcing a bearish tilt in the market. Recent comments from US President Donald Trump, who indicated comfort with oil prices falling below $60, suggests that US policy may not act to support higher prices despite political risks.

Forecasts from major institutions like Goldman Sachs have also turned more bearish. With US and global demand softening and secondary sanctions unlikely to materially reduce supply, analysts believe the path of least resistance for oil could be lower—especially if OPEC output rises as expected.

Yen under pressure amid political and policy uncertainty

The Japanese yen has come under renewed pressure following political upheaval in Japan and ongoing reluctance from the Bank of Japan to tighten policy. Real interest rates in Japan remain deeply negative, while inflation continues to run well above target. Markets are concerned that any successor to outgoing officials may adopt even looser fiscal policies.

There is growing belief that the Bank of Japan may eventually be forced to hike rates to stabilise the yen and contain inflation. In the meantime, rate differentials continue to favour the US Dollar, though that Dollar strength could wane if US growth slows further and inflation data surprises to the upside.