US jobs report, China economy boosters to dictate commodities next week

China impressed the markets this week by allowing some of its largest cities to reduce down payments for homebuyers and encouraging lenders to lower rates on existing mortgages and deposits.

This week witnessed a notable shift in market sentiments, suggesting that traders are beginning to see signs of improvement. The impact of the Federal Reserve’s tightening measures appears to be taking shape, and the rollout of fresh stimulus measures in China has captured the attention of investors.

The eagerly anticipated US non-farm payrolls report presented a mixed picture. While payrolls expanded by 1,87,000 in August, surpassing the estimate of 1,70,000, indicating resilience in the labour market, other aspects were less rosy. Average hourly earnings showed modest growth, and the unemployment rate unexpectedly rose to highest rate since February 2022. Overall, the data pointed to a labour market that remains tight, supporting a recovery in the US dollar from lower levels.

During the week, the US dollar largely traded on a negative trajectory in line with mostly softer US economic data. Key economic indicators, such as US JOLTs job openings (a measure of labour demand) and private employment data, revealed some weakness. Moreover, US Core PCE, the Fed’s preferred gauge of inflation, increased by 0.2 percent month-on-month and 4.2 percent year-on-year in July 2023, aligning with the market expectations. The second-quarter GDP was revised lower, although personal spending saw a significant increase, surpassing forecasts and indicating consumer resilience.

COMEX Gold surged to a three-week high of $1,980.2 per troy ounce as the dollar initially slipped to 102.93, and the US 10-year yields extended their pullback from 16-year highs reached earlier in the week. This shift in gold prices was driven by increasing odds of the Federal Reserve nearing the end of its tightening cycle.

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Bets on the Fed leaving rates unchanged in September rose above 90 percent, up from 80 percent the previous week. Furthermore, the odds of a rate pause in November and December also climbed to nearly 60 percent, according to the CME Group’s Fed Watch tool.

Crude oil prices ended a two-week losing streak, posting their most significant weekly gain since April, with a 7.5 percent increase. This rally was attributed to Russia’s indication that it would extend export curbs, along with a massive draw of 10.6 million barrels in US crude oil inventories for the week ending August 25. This draw, pushed total stocks to 422.9 million barrels, their lowest level since December 30.

Base metals also experienced a sharp rally as investors assessed China’s latest stimulus measures and the possibility that the worst of China’s factory slowdown may be coming to an end. China’s official manufacturing PMI showed a slight improvement to 49.7 in August, although it remained in contraction territory. China’s efforts to boost its equity, currency, and property markets succeeded in calming some investor nerves.

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China impressed the markets this week by allowing some of its largest cities to reduce down payments for homebuyers and encouraging lenders to lower rates on existing mortgages and deposits. Additionally, China reduced the foreign exchange reserve requirement ratio for financial institutions and trimmed stamp duty on stock trades. With no major economic data releases scheduled for the upcoming week, the outcome of the US labour report and China’s plan of action to boost its economy may dictate market direction.

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