Market Analysis: as NFP failed to do so, will US CPI determine rate cut size?

Going into Friday’s Us jobs data it seemed like the immediate path of interest rates would be decided, but it wasn’t. The outcome showed a resilient labour market in the US, with growing employment, but a little bit slower than anticipated, while the unemployment rate ticked down. Meanwhile, the stronger-than-expected wage growth likely saw some jitters arise as wage inflation continues to be a concern.

The outcome of the data was a lack of clarity on what will happen at the September 18 FOMC meeting. The economy is showing signs of deceleration but there is no clear indication as to whether 25 or 50 basis points would be the appropriate decision for the first rate cut from the Federal Reserve. Will the CPI data later this week give more insight?

So far, the view on how much to cut depends on one’s view of the economy. So far, the data has been pretty ambiguous, so it can be read either way. Forecasts for the August inflation report suggest a significant drop in headline CPI, from 2.9% to 2.6%, which would be the lowest reading since March 2021. The disinflation process has stalled in recent months but if forecasts are right, the August drop could see expectations lean closer to a 50 basis point cut throughout this week, possibly giving risk assets another leg higher. 

US CPI expectations

_{Source: refintiv}

That said, focus may remain on the core CPI data, which has been sticky for some time. A lack of progress in less volatile prices could see the risk-positive momentum stall this week as traders may determine that the reading is not soft enough to convince the Federal Reserve to cut 50 basis points next week. 

The momentum so far this week has started pretty solid for equities in Asia and Europe, with US equities seeing some further resistance with a stronger dollar and rising yields. Commodities have also started the week on the front foot, but gold is struggling to find upside support as the precious metal seems to be lacking direction ahead of the CPI data on Wednesday. Both a recession and lower rates would benefit gold so it is likely that buyers are taking it easy before committing to the commodity, with focus on how the data plays out over the coming days. 

XAU/USD daily chart

_{Past performance is not a reliable indicator of future results.}