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Anyone who had pinned their hopes on an imminent interest rate hike by the Federal Reserve will likely be let down again. The disappointing U.S. jobs data is the latest setback in the efforts to normalize the benchmark interest rates. Yet market participants are not giving up completely. They still believe in the likelihood of a rate rise before the end of the year. This will depend in part on how international affairs shape the Fed's concerns as always. Breaking news from the G20 meeting has Russia beginning a new cooperation with Saudi Arabia to support oil prices. German Premier Angela Merkel also suffered an election blow that may be the beginning of the end for her long lasting political leadership of the EU's most important economy. This could spell further instability for the world's largest economic block the European Union. All of these latest developments support gold prices.
Disappointing U.S. Jobs Report A Setback to Hopes of Interest Rate Hike Yet Again
Fed watchers and economists had hoped for an August jobs report of 180,000 new nonfarm payrolls. Instead what they got last Friday was a weak 151,000 for the last month of summer. This less than impressive headline number came on the heels of two consecutive months of healthy gains that had begun to encourage observers to think that the Fed might raise rates at their September meeting. The hourly wage component of the report also came in lower than expected at .1% versus the anticipated .2% increase for August. This signals that inflation is still under control. The chart on the civilian labor force participation rate from the Bureau of Labor Statistics reveals the continuing weakness in the job market. The participation rate is still under 63% in a long term downtrend, and it has not yet recovered to levels seen as recently as 2014.
Markets are now anticipating slightly over 20% odds that the Fed will increase U.S. interest rates for September. They have also reduced their chances for a rate hike by the end of the year to around 50% versus the 55% odds priced before the jobs data came out last week, per the CME Fed Watch. The market players still believe in an interest rate increase by the end of the year based on the U.S. economy's other underlying strengths.
Jeffrey Lacker, President of the Richmond Federal Bank, made his position clear when he said Friday that the American economy seems to be strong enough to justify significantly higher rates. This has encouraged the major banks on Wall Street that the Fed will manage to raise the interest rates a single time before the end of the year and probably in December. This week the direction of the dollar and gold will likely gyrate around the various speeches and comments made by Fed officials.
G20 China Summit Reveals Oil Cooperation Deal Between Saudi Arabia and Russia
Russia has already stepped up as one of the major players at this year's China G20 summit after years of diplomatic isolation. Vladimir Putin has met with new British Prime Minister Theresa May and U.S. President Barrack Obama on the conference sidelines. The latest announcement from the summit could prove to be the most important one for the markets and gold.
Reuters reported that the two leading oil producers Russia and Saudi Arabia would issue a joint statement from the G20 meeting in China calling for OPEC, Russia and others to work together to support the prices of oil markets. Saudi Arabia has signed a deal with Russia to cooperate in the oil markets. Initial reports were that Russia would send a delegation to the OPEC meeting in Vienna in November. A breaking announcement from the conference revealed that Russia and OPEC will hold official talks at the Vienna meeting. Oil prices were up over 2% today on the news that they will work together to reduce the supply. In the last two years, the prices have plunged by over half to less than $50 per barrel (since 2014) because of massive supply that was substantially greater than demand.
Germany's Merkel Tarnished by Defeats Means Uncertainty for EU
Something to watch is German Chancellor Angela Merkel's future as the leader of EU economic superpower Germany. For over a decade Mother Merkel (as the Germans called her) has held Germany and the European Union together despite the substantial setbacks of the Greek economic collapse, the European migrant crisis, and the Brexit referendum for the United Kingdom to leave the political and economic block. She has become the iron lady that holds the unwieldy but economically critical group together.
This past weekend, Merkel suffered a serious latest blow to her hold on power. The state where she is from held its regional election. Her party came in third place behind one of the anti-immigration parties. This calls into question not only Germany and the EU's immigration policy, but how long Merkel can remain in power. “(The result was) a blow to the chancellor personally and sharpens the question over whether she will lead her party into next year's general election,” Alastair Newton, co-founder and director of Alavan Business Advisory, wrote Sunday in a note.
Her junior coalition partner the SPD Social Democrats took 30% of the state vote. The Alternative fuer Deutschland (AfD) party secured 21% on a platform against immigration and the establishment policies that have helped to hold the EU together. Merkel's own CDU party garnered 19% of the vote. This was not only third place, but the worst result the party ever suffered on its own turf, per Reuters. The bigger problem is that it is Merkel's cornerstone immigration policies which have helped more than a million refugees fleeing countries like Syria and Iraq to come to Germany that are bringing her down. This is also not her first setback politically. Other local elections held earlier in 2016 had shown the AfD party attracting a significant rise in support at her party's expense. This is important to watch as without a strong German leader like Merkel at the helm, the European Union's days could be numbered.
The Bank of Japan Disappoints
The Bank of Japan has let down observers who felt confident there would be an indisputable signal that the Japanese monetary policy would be eased more this month. BOJ Governor Kuroda has indicated he is ready to additionally expand the central bank's already enormous stimulus program. Despite this, he would not give specific hints or promises investors had waited for on the odds of the BOJ actually easing the policy at their upcoming September 20-21 meeting.