Wall Street drops and gold breaks-out heading into a seasonally bearish September

The markets looked through US PCE data and ahead to this week’s Non-Farm Payrolls data going into a seasonally bearish September.

PCE data comes in as expected as jobs data comes into focus

US PCE data didn’t tell the markets anything they didn’t already know: US inflation is picking up again, or at least the price level adjustment from tariffs is materialising, but all as expected. The critical annual core PCE figure rose 2.9% for the month – bang in-line with estimates. The markets largely took the numbers in stride, albeit with a level of caution as inflation drifts from the Fed’s target. Nevertheless, given the Fed’s tacit guidance that it intends to continue cutting rates despite a projected lift in the index to 3.1% before the end of the year, the data didn’t derail expectations of a rate cut this month. The odds currently stand at about 86%.

Most of the focus shifts to the US jobs data at the end of the week. The data is unlikely to change expectations of a rate cut from the US Federal Reserve. However, the jobs data will provide a clearer picture of how aggressive the Fed may need to be in easing policy to protect the labour market. A disappointing print, despite raising the prospects of deeper cuts going forward, could stoke fears, as it did last month, that the US economy is accelerating off of a cliff. The issue is to what extent the Fed is behind the curve in cutting rates. If it appears that the Fed isn’t out in front of the slowdown, it could weaken risk appetite.

Wall Street drops and gold lifts heading into a seasonally bearish September

Wall Street still pulled back to round out August amid signs of exhaustion going into a seasonally weak month of September. Over the last ten years, September has proven the worst month for the S&P 500, averaging a drawdown of nearly 2%. The sell-off in US stocks was led by tech stocks as questions persist about valuations and heavy concentration. Unlike recent market dynamics, the drop in tech stocks wasn’t offset by a rotation into cyclicals. While the moves could be a symptom of end of month flows, equities are looking shaky and vulnerable to shocks at current levels.

Amidst the shakiness in risk assets, gold prices appear to be breaking out. The commodity has carved out a long and protracted pattern of consolidation, with clear selling pressure coming through on pushes through $US3400. Fears of a US slowdown and imminent Fed cuts, fresh tensions between Ukraine and Russia – including new threats of sanctions on Russia – and doubts about Fed independence are proving tailwinds for gold, as it breaks technical resistance.

(Source: Trading View)
(Past performance is not a reliable indicator of future results)