Macro Matters – Weekly review, w/c September 4

A shift in U.S. Federal Reserve expectations, soft labor market data, and the potential impact of El Niño on energy markets set the tone for a volatile week in financial markets. Risk assets rallied while commodities like oil and gold responded to weakening yields and a softer U.S. dollar.

The Federal Reserve’s rate hike outlook has shifted, with softening labor data reducing the likelihood of a September hike. According to the CME FedWatch tool, the probability of a September hike is now only 10–15%, with May 2024 targeted for the first rate cut. This dovish pivot has triggered a rally across U.S. equity futures, metals like gold, and a stalling of the USD rally.

Sea surface temperatures are 1.3°C above the seasonal average, signaling a potential strong El Niño event this winter. Historically associated with warmer winters, this could lower demand for heating products like oil, weighing on energy prices. Warmer weather may also positively affect risk sentiment by reducing energy cost pressures, but much depends on whether this trend persists.

Friday’s Nonfarm Payrolls report indicated a softening labor market, with job openings dropping to a two-year low. Despite tight conditions, unemployment rose to 3.8%, easing pressure on the Fed for further rate hikes this year. Weakening U.S. labor data and falling Treasury yields have led to a corrective bias for the USD. A break below key support levels could signal a shift to a bearish trend for the Dollar Index. Dovish rate expectations have fueled a recovery in U.S. index futures. The S&P 500 and NASDAQ 100 futures broke key resistance levels, suggesting the potential for further gains if technical momentum holds.

Inflation signals in August and cautious comments from ECB members like Holzmann suggest a pause in September is possible. This leaves the euro vulnerable to underperformance if the ECB opts for caution. Despite hawkish expectations for the Bank of England, weaker UK economic data and potential headwinds from further rate hikes could cap the pound’s gains.

China’s government has promised to accelerate fiscal spending and use the 2023 bond quota by the end of September. However, weak trade data and subdued domestic demand could limit the impact. With inflation easing and unemployment ticking higher, the Reserve Bank of Australia is expected to hold rates steady at 4.10%. Markets anticipate no cuts until late 2024.

Strong U.S. demand and falling inventories pushed NYMEX oil prices above $84.89, marking their highest levels since November 2022. A sustained breakout could target $90 in the near term. Gold prices have rebounded, supported by falling U.S. yields and a weakening dollar. Key support between $1911–$1921 needs to hold for the bullish trend to continue.

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