On Monday morning (September 9th), spot gold fluctuated narrowly in the Asian market, currently trading around $2496.47 per ounce. Gold prices rose and fell back last Friday due to lower than expected non farm payrolls. Gold prices hit a nearly three week high of around $2529.06 per ounce, approaching a historical high, but quickly gave up their gains as the unemployment rate fell and the Federal Reserve's "third in command" did not signal a 50 basis point rate cut to the market, raising doubts about the extent of the Fed's interest rate cut later this month.

A report from the US Department of Labor shows that non farm payroll jobs increased by 142000 in August, with economists expecting 160000. The growth rate for July has been revised down to 89000 units. However, the unemployment rate is 4.2%, which is in line with expectations and lower than 4.3% a month ago.

Aakash Doshi, head of North American commodities at Citigroup Research, said that gold paper traders are debating whether the Federal Reserve will cut interest rates by 50 basis points or 25 basis points on September 18th, and gold prices are reacting to this.

The labor market is cooling down at an orderly pace, "said Jeffrey Roach, Chief Economist of LPL Financial. Enterprises are still increasing their workforce, but not blindly as before. The Federal Reserve may cut interest rates by 25 basis points and leave room for more aggressive action at the last two meetings of this year

The lower than expected employment growth in August may reflect not only a decrease in job vacancies indicating weakened demand, but also a seasonal anomaly, where August employment growth initially tends to be lower than consensus expectations and later undergoes upward revisions.

In the past 13 years, the initial value of August employment growth has been revised upwards for 10 years. Goldman Sachs economists pointed out that in industries where initial values are usually biased towards negative, employment growth in August was 42000 jobs lower than the six-month average, "suggesting that the data released on September 6th may have underestimated the actual employment growth for that month.

The proportion of industries reporting employment growth increased from 47.8% in July to 53.2%. After a 0.2% month on month increase in July, the average hourly wage increased by 0.4% in August. Salary increased by 3.8% year-on-year, with a growth rate of 3.6% in July.

According to the CME FedWatch Tool, traders currently believe that the probability of a 25 basis point rate cut this month is 71%, and the probability of a 50 basis point rate cut is 29%. Before the non farm payroll data, the probability of the Federal Reserve cutting interest rates by 50 basis points in September was expected to reach as high as 47% in the market last week. After the non farm payroll data, the market expected the probability of the Federal Reserve cutting interest rates by 50 basis points in September to briefly rise above 50%, but then quickly fall back.

The third in command of the Federal Reserve and President of the New York Fed, Williams, stated last Friday that a more balanced economy has opened the door for interest rate cuts, but the overall path of interest rate cuts will be determined by economic performance.

The economy is currently in a state of balance, and inflation is also moving towards 2%. Therefore, it is appropriate to lower the target range of the federal funds rate to reduce the degree of policy stance restrictions, "Williams said in a speech at a meeting of the Council on Foreign Relations in New York." Over time, the stance of monetary policy can become more neutral, depending on changes in data, prospects, and the risk of achieving our goals

But Williams is unwilling to comment on the specific details of the pace and magnitude of the upcoming easing policy, as well as the magnitude of the first interest rate cut later this month. He told reporters, "I personally have no opinion on this at the moment

Williams said broadly, "It's clear that we need to bring interest rates back to a more normal level over time. The problem with this statement is that I'm not sure what a more normal level is, and I'm not sure how long it will take

The US dollar rose in volatile trading last Friday, hitting a new low of over a week at 100.55 during trading, but then twisted and slightly rose, reaching a high of 101.40 and closing at 101.18, an increase of about 0.13%. Previous data showed that US employment growth in August was lower than expected, but it indicates that the labor market is only steadily slowing down, which may support the Federal Reserve to gradually cut interest rates.

I think the market is really fixated on this report because it can indeed be used as a reason to cut interest rates by either 25 basis points or 50 basis points, "said Gennadiy Goldberg, head of US interest rate strategy at TD Securities

Karl Schamotta, Chief Market Strategist of Toronto based payment company Corpay, said, "It seems more likely that the US economy will slip off track in the coming months, which proves that Federal Reserve officials have reason to make increasingly aggressive responses

He said, "The possibility of the Federal Reserve cutting interest rates by 50 basis points at its September meeting is still low, but the data released on September 6th provides clear evidence of a sharp deterioration in labor market fundamentals and will strengthen bets on at least one major rate cut in the coming months

Federal Reserve Governor Waller said last Friday that the "time has come" to begin a series of interest rate cuts, but she remains open about the magnitude and pace of the cuts.

If the data supports a rate cut in consecutive meetings, then I believe it would be appropriate to do so, "Waller said in a speech prepared for the University of Notre Dame“

Waller's tone was more forceful, implying that he was willing to cut interest rates by 50 basis points at the beginning. He said that the data shows that the economy is softening rather than deteriorating, and it does not seem to be heading towards a recession, but "as the focus of the Federal Reserve's policy shifts from inflation first to maintaining full employment, the current series of data indicates that patience is no longer needed, but action is needed.

Waller said that although the Fed's interest rate cuts, which will begin at its next meeting, "will be cautiously carried out in the context of sustained economic and employment growth, I am ready to take swift action to support the economy if necessary as inflation stabilizes

Influenced by the decline in the number of new jobs and Waller's speech, the yield of the US 10-year treasury bond bond fell last Friday. Earlier in the session, it hit a 15 month low in volatile trading, which still provided some support for gold prices.

The yield of the US 10-year treasury bond bond fell 2.5 basis points to 3.708% late last Friday, hitting 3.648%, the lowest level since June 2023.

The yield of two-year treasury bond fell 10.6 basis points to 3.646% on Friday, the lowest since March 2023, which was 3.595%.

The employment report suggests that the Federal Reserve has no reason to act too hastily, "said Drew Matus, Chief Market Strategist at MetLife Investment Management. The labor market is slowing down, but the pace is slow, allowing the Federal Reserve to take more cautious action in September

However, some details in Friday's report, including revising down employment growth by 86000 over the past two months, may be a warning that the labor market is not as healthy as people hope.

Goldberg from TD Securities said, "We do believe that the labor market has not only failed to reach equilibrium, but has also begun to significantly cool down, which may make the Federal Reserve quite nervous

This week's decline brings in the US August CPI data, and investors need to focus on the performance of the data and pay attention to changes in market expectations.

The overall CPI in the United States fell to 2.9% year-on-year in July, and the market expects it to drop to 2.6% again in August. However, the core inflation rate is expected to remain unchanged at 3.2%, the lowest level since May 2021. If these data are confirmed, the Federal Reserve is more likely to adopt a 25 basis point dovish rate cut. But in order for there to be a realistic possibility of a 50 basis point interest rate cut, there must be a significant downward shock.

This week will also see the European Central Bank's interest rate decision, and investors need to pay attention. The vast majority of economists expect the European Central Bank to cut interest rates by 25 basis points at its September 12 meeting, and to cut rates again in December. This may provide some support for gold prices, as interest rate cuts will lower the opportunity cost of holding gold.

Sources close to discussions with the European Central Bank indicate that decision-makers are divided on the relationship between inflationary pressures, weak economic growth, and potential recession.

Luca Mezzomo, head of macroeconomic analysis at the Italian Union Bank of Sao Paulo, said, "The recent slowdown in wages and weak economic activity have raised the possibility of interest rate cuts

On this trading day, we need to pay attention to China's August CPI data and the one-year inflation expectations of the New York Fed in August.

Daily chart of spot gold