Gold rose on Monday after traders slashed the odds of an October Fed rate hike to 22% from 64% a week earlier, following a weak September jobs report. December hike expectations remain high at 87%, keeping the Fed's tightening path intact even as gold gets a near-term lift.
Gold climbed after markets cut their bets on an October Federal Reserve rate hike. The CME FedWatch Tool now shows a 22% probability of an October hike, down from 64% a week earlier. That repricing is the main driver behind Monday's move in the metal.
Weak jobs data forces the repricing
The September US jobs report showed employment growth slowing more than expected, and payroll figures for the previous two months were revised lower. The downward revisions suggest the labor market has been losing momentum faster than previously reported. As a result, traders pulled back their bets on an immediate rate hike.
Markets have not abandoned the Fed's tightening path, however. December hike expectations still stand at 87%, so investors are pricing a delay rather than an end to rate increases.
Lower rate odds cut gold's opportunity cost
Gold pays no interest, so it becomes less attractive when rates and bond yields rise. When markets expect the Fed to delay a hike, the opportunity cost of holding bullion falls, making it more attractive relative to interest-bearing assets. The sharp drop in October hike odds therefore gives gold a direct boost.
Yet Treasury yields have stayed elevated despite the weaker labor data, which limits how much the lower rate expectations can lift gold on their own.
Fed faces a labor market and inflation problem
The Fed raised its benchmark rate by 25 basis points last month to a range of 3.75% to 4.00%, its first increase in three years, as higher oil prices tied to the Iran conflict added to inflation risks. Now weaker employment data gives policymakers another reason to slow the pace of tightening.
The next test comes Oct. 14, when the US releases its September CPI report, ahead of the Fed's Oct. 27-28 policy meeting. If that report shows inflation cooling, yields could come under further pressure as traders price a greater chance of a pause, which would strengthen the case for gold to extend its gains.
The Middle East remains a risk to that outlook: any sustained disruption to oil supplies could push energy prices higher and slow the decline in inflation, complicating the Fed's response to the weaker labor market.
Source: Commodities Analysis & Opinion
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