Gold trading reminder: Beautiful non-agricultural data vs. chaos in the Middle East, gold prices fluctuate at high levels, this week will usher in the FED meeting minutes and US CPI

In the early Asian session on Monday (October 7), spot gold fluctuated in a narrow range and is currently trading around $2,651.29 per ounce. Gold prices fell slightly after violent fluctuations last Friday, closing at $2,652.64 per ounce, as the stronger-than-expected US employment report poured cold water on the Fed's expectations of aggressive interest rate cuts in November, boosting the dollar to a high of more than one and a half months, and US Treasury yields also rose sharply to a high of nearly two months, overshadowing risk aversion concerns over the tense geopolitical situation in the Middle East.

U.S. job growth accelerated in September, and the unemployment rate fell to 4.1%, further easing the pressure on the Fed to cut interest rates by another 50 basis points at the November 6-7 policy meeting.

"Gold fell as a strong non-farm payrolls report looks likely to lock in a 25 basis point cut in November," said Tai Wong, an independent metals trader in New York. "Last month's data was also revised up, which we haven't seen in many months, and the unemployment rate was lower, even if the participation rate was flat."

After the data was released, the US dollar index jumped to a seven-week high, making gold more expensive for overseas buyers. Gold prices fell to around $2,631.95 an ounce, and although it was subsequently shaken by safe-haven buying, gold prices once rebounded to around the 2,670 mark, but as the dollar and U.S. Treasury yields held firm, gold prices still fell back to around the 2,650 mark in late trading on Friday.

Traders reduced their expectations of a 50 basis point rate cut in November from 28% before the release of non-farm data to nearly 3%.

"We are heading into a weekend of boiling geopolitical tensions, which really limits the range of accounts willing to sell gold," said Daniel Ghali, commodity strategist at TD Securities on Friday.

U.S. job gains in September were the biggest in six months, underscoring economic resilience

The U.S. economy added the most jobs in six months in September and the unemployment rate fell to 4.1%, suggesting that the economy is vibrant and may not need big interest rate cuts from the Federal Reserve for the rest of the year.

In addition to the Labor Department's report on Friday that nonfarm payrolls rose more than expected, wages also rose at a solid pace in September. The closely watched jobs report also showed that July and August added 72,000 more jobs than previously reported.

Federal Reserve Chairman Jerome Powell acknowledged the improvement in economic conditions last week as he pushed back against traders' expectations of another 50 basis point rate cut in November, saying "the (policy-making) committee is in no rush to cut rates quickly."

"The latest report reinforces the theme of broad resilience in the U.S. economy and dispels concerns that labor market conditions are about to deteriorate," said Jonathan Millar, senior economist at Barclays. We maintain our forecast for a 25 basis point rate cut in November.

The Labor Department's Bureau of Labor Statistics said nonfarm payrolls increased by 254,000 jobs in September, the largest gain since March. Economists polled by Reuters had forecast an increase of 140,000 jobs. The August data was initially reported to be an increase of 142,000.

Economists’ estimates for September job gains ranged from 70,000 to 220,000. The three-month average of monthly job growth rose to 186,000 from 140,000 in August.

The share of sectors reporting job gains jumped to 57.6% from 51.8% in August.

Since the Fed kicked off its easing cycle with an ultra-large 50 basis point rate cut last month, a string of strong data, including on consumer spending, has left some economists wondering if policymakers are too nervous.

“If the Fed had known about the July and August data revisions in advance, they would have likely cut by only 25 basis points,” said Kyle Chapman, currency market analyst at Ballinger Group.

Financial markets are betting on a 25 basis point rate cut in November to 96% from 71.5% before the report, according to CME’s FedWatch tool. The odds of a 50 basis point rate cut have fallen to almost zero.

Strong hiring and low layoffs combined to boost average hourly earnings, which rose 0.4% in September after rising 0.5% in August. They rose 4.0% year-over-year after rising 3.9% in August. However, the average workweek slipped to 34.2 hours in September from 34.3 hours in August. Economists are not worried that rising wages will reignite inflation.

The unemployment rate fell to 4.1% in September from 4.2% in August, reflecting an increase of 430,000 households, far more than needed to absorb 150,000 new workers in the labor force.

The dollar hit a seven-week high on Friday, setting up its best week since September 2022, after a surprisingly strong September jobs report prompted traders to cut bets on a further 50 basis point rate cut by the Federal Reserve.

"It's a strong jobs report by any measure," said Karl Schamotta, chief market strategist at Corpay. "I think the scenario of a no-landing U.S. economy is suddenly more credible."

"The expectation now is that the Fed will be much more cautious in easing policy," said Schamotta.

The Fed is expected to cut rates by 25 basis points at each meeting until March 2025, and then by 25 basis points each quarter until the end of 2025, Aditya Bhave, U.S. economist at Bank of America, said in a report on Friday.

"The data flow has been very positive since the Fed decided to cut rates by 50 basis points in September," he said, calling the latest report an "A+."

Chicago Fed President Goolsbee called the latest U.S. jobs report "excellent" on Friday and said more labor market data like it would bolster his confidence that the economy is at full employment and inflation is low.

The dollar index hit 102.69 last Friday, the highest since August 16, with five consecutive positive daily lines and a weekly increase of 2.02%, the best weekly percentage gain since September 2022.

U.S. Treasury yields hit a two-month high, and the September employment report was stronger than expected

The U.S. 10-year Treasury yield climbed to its highest level in nearly two months on Friday after a stronger-than-expected September employment report further weakened the possibility of a sharp interest rate cut by the Federal Reserve at the remaining two meetings this year.

The 10-year Treasury yield hit its highest level since August 9 last Friday, and rose 13.7 basis points to 3.981% at the end of the session. It hit 4.006% in the Asian market on Monday (October 7).

The two-year Treasury yield hit its biggest one-day increase since April 10 last Friday and hit its highest level since September 3. The yield rose 22.5 basis points to 3.925% at the end of the session.

Eric Winograd, U.S. economist at asset management company Alliance Bernstein, wrote in a report last Friday: "Before the release of the non-farm data, the question in the market was whether the Federal Open Market Committee (FOMC) would cut interest rates by another 50 basis points in November, or only 25 basis points. Now the question is whether they will cut interest rates or skip a meeting."

Bank of America economists Stephen Juneau and Jeseo Park wrote in a report last Friday: "Inflation continues to move in the right direction, which will allow for further rate cuts. However, we still believe that labor data is more important for the extent of rate cuts."

Jan Nevruzi, vice president of U.S. interest rate strategy at TD Securities, also believes that the inflation data released on October 10 is unlikely to affect the Fed's interest rate path. "We still expect to cut rates by 50 basis points by the end of the year - 25 basis points at each of the next two meetings," he said.

Israel continues bombing Lebanon and Gaza Strip on anniversary of Israeli-Palestinian conflict

Israel bombed targets in Lebanon and Gaza Strip on Sunday, ahead of the first anniversary of the October 7 attack that triggered the war in Israel. Israel's defense minister declared that all options are open to retaliating against arch-enemy Iran.

Following rallies in major European capitals, Washington and New York last Saturday, pro-Palestinian demonstrators continued to protest Israel's military actions around the world, including in Jakarta, Istanbul and Rabat.

Late Sunday night (October 6), the southern suburbs of Beirut were bombed again by Israel, with huge fireballs and explosions appearing on the dark skyline. Air defense sirens sounded in northern Israel, including the city of Haifa.

Israeli Defense Minister Yoav Gallant said on Sunday that Israel will independently decide how to deal with Iran, although Israel is coordinating closely with its long-time ally the United States.

"Everything is on the table," Galant told CNN, where he will meet with U.S. Defense Secretary Lloyd Austin on Wednesday. "Israel has the ability to strike near and far targets -- we have proven that."

Early Sunday, Israel launched airstrikes on the southern suburbs of Beirut in its heaviest bombardment of the Lebanese capital since it significantly escalated its fight against the Iran-backed Hezbollah last month. In southern Lebanon, Israeli soldiers struck Hezbollah's underground infrastructure, weapons depots and observation posts in ground raids, the IDF said.

Late Sunday, Israel declared three more areas on its northern border as restricted military zones, adding to more than five areas that had been closed as military assembly areas last week.

The Israeli attack on a building in the central mountain town of Kayfoun killed six people and wounded 13, while an attack on the nearby town of Qmatiye killed another six people, including three children, and wounded 11, the Lebanese Health Ministry said.

In the Gaza Strip, Israel on Sunday struck a mosque and a school housing displaced people, killing at least 26 people and wounding 93, according to the media office of the Hamas-run Gaza government. The Israeli military said it carried out "precision strikes against Hamas terrorists."

In attacking Israel last week, Iran also cited Israel's assassination of Hezbollah leaders, which have dealt a heavy blow to the group.

Mahmoud Qmati, a senior Hezbollah political official, told Iraqi state television on Sunday that Hezbollah was led by a joint command before a leader was designated.

The United Nations refugee chief said on Sunday that Israel's airstrikes had "repeatedly" violated international law by hitting Lebanon's civilian infrastructure and killing civilians.

Israel says it targets military capabilities and acts to reduce the risk of harm to civilians; Lebanese authorities say civilians have been targeted. Israel accuses Hezbollah and Hamas of hiding among civilians, which they deny.

This week’s outlook

Inflation data from the world’s two largest economies, the Reserve Bank of New Zealand’s rate decision, speeches by Fed officials, tensions in the Middle East and expectations of further stimulus from the Asian giant will shape financial markets this week.

The US is set to have another busy week of data: key figures include September CPI and PPI, trade, weekly jobless claims and the University of Michigan’s preliminary October consumer confidence index.

At least 13 Fed officials will give their views on the outlook for the US economy and interest rates, and markets will also pore over the minutes of the Fed’s September meeting on Wednesday. US earnings season kicks off on Friday.

Markets in the Asian giant will reopen on Tuesday after the Golden Week holiday, with hopeful investors expecting further stimulus from the Asian giant’s government. September CPI and PPI, due on Sunday (October 13), will be watched for signs of easing deflationary pressures. The Asian giant may also release data on credit and social financing this week.

The Reserve Bank of New Zealand will meet on Wednesday. A Reuters poll showed 60% of economists expected the central bank to cut rates by 50 basis points, but according to LSEG data0#RBNZWATCH, the market is almost 100% expecting this as the economy shrinks and price pressures are at their lowest level in nearly four years.

The eurozone data schedule is light, with eurozone retail sales and German industrial orders due on Monday, followed by German industrial production and the minutes of the European Central Bank's September meeting, which are unlikely to bring surprises.

In the UK, the Bank of England's monetary policy report hearing in parliament on Thursday may cause volatility, and monthly data on August gross domestic product, trade, services and industrial production will be released on Friday, which will provide a comprehensive overview of the UK economy.

Japan has a quieter schedule, with data such as trade and current account. After a turbulent week for Japanese markets, Japanese Prime Minister Shigeru Ishiba hopes that the Bank of Japan will raise interest rates slowly, which has cooled expectations of rate hikes, so there may be less drama in Japan.

Australia is on holiday on Monday, and the only data released this week are business and consumer confidence indexes. The Reserve Bank of Australia will release the minutes of its September meeting, and the market will also focus on the remarks of RBA Deputy Chairman Andrew Hauser, Assistant Chairman Christopher Kent and Assistant Chairman Sarah Hunter.