Ut sed et omnis rerum maiores.

Key Data Insights

A. United States & The Federal Reserve

- Labor Market Deterioration is Severe and Real:
  - - The annual benchmark revision wiped -911k jobs from the previous count for March 2024–March 2025, cutting the average monthly gain over that period by half to ~75k.
  - - August payrolls grew by just 22k. The 3-month average job growth has slowed to 29k per month.
  - - Initial Jobless Claims spiked to 263k for the week of Sept. 6th, the highest level since October 2021.
  - - The unemployment rate rose to a new cycle high of 4.32%.

- Inflation is Cooling Faster Than Expected, With Muted Tariff Pass-Through:

- Unanimous Fed Expectation for Imminent Easing:
  - - All banks forecast a 25 basis point (bp) cut at the September 17th FOMC meeting, bringing the policy rate to 4.00-4.25%. Markets price a 5-10% probability of a larger 50bp cut.
  - - Citi’s Projection: 125bp of cuts over the next five meetings (25bp per meeting).
  - - Scotiabank’s Projection: A path of six consecutive quarter-point cuts to a trough of 3.0% by Q2 2026.
  - - The updated “dot plot” is expected to shift dovishly, with the median 2025 dot moving from 50bp of cuts to 75bp or more.

- Political Pressure: Significant concern exists over political pressure on Fed independence, including attempts to remove Governor Lisa Cook (under appeal to the Supreme Court) and the upcoming appointment of a “shadow Fed chair.”

B. Canada & The Bank of Canada

- Scotiabank expects a 25bp cut to 2.50% in September, contrary to a divided consensus.

- The Case for a Cut: Economic contraction in Q2 (-1.6% q/q SAAR), loss of over 100k jobs in July/August, and a rising unemployment rate (7.1%).

- The Case for a Hold: Sticky core inflation (3-month average running at ~2.5% MoM SAAR) and acute wage pressures (~5% m/m SAAR).

- Scotiabank’s contrarian view: They forecast the 2025 “insurance” cuts will be fully reversed in H2 2026, with the rate rising back to 2.75% due to persistent inflation.

C. Other Global Central Banks

- ECB: Held rates at 2.00%. Staff projections were revised, showing 2027 core inflation at 1.8% (down from 1.9%). President Lagarde stated the “disinflationary process is now over,” signaling a high bar for future cuts. The bank is expected to be on hold for the foreseeable future.

- Bank of England: Unanimously expected to hold at 4.00% due to persistent services inflation.

- Norges Bank (Norway): Expected to cut by 25bp to 4.00%.

- Bank of Japan: Unanimously expected to hold at 0.50%.

D. Market Implications & Strategy

- Rates: The U.S. yield curve is expected to steepen. Long-end (10Yr) yields are seen as undervalued at ~4.0%, with fair value closer to 4.25% due to sustained inflation expectations from tariffs.

- Foreign Exchange (FX): Universally bearish USD outlook. Lower U.S. rates will cheapen USD hedging costs (from ~2.2% to ~1.0%), mechanically weakening the dollar. Targets include EUR/USD at 1.20 and USD/JPY at 140.

- Equities & Commodities: A dovish Fed is supportive for risk assets. Gold is a favored asset, with forecasts rising to $3,250/oz in 2025. Correlations between gold and equities are turning more positive in a dovish regime.

The balance of risks has decisively shifted from ‘inflation upside’ to ’employment downside.

Conclusions and Implications

1. Imminent Policy Pivot: The Fed is poised to begin a steady easing cycle, driven not by conquered inflation but by a pre-emptive desire to insure against a material weakening of the labor market. The balance of risks has decisively shifted from “inflation upside” to “employment downside.”

1. Global Divergence: The global central bank landscape is fracturing. The Fed and BoC are embarking on easing cycles, the ECB and BoE are on an extended pause, and the BoJ remains the lone major bank with a tightening bias.

1. Inflation is the Key Risk: The core conclusion from Scotiabank and a latent risk in other reports is that central banks are likely underestimating the persistence of inflation. The assumption that tariff impacts are “transitory” may be incorrect, potentially forcing a policy reversal (as explicitly forecast for the BoC) or a more aggressive tightening cycle later.

1. Data-Dependent Path: While the first cut is certain, the future pace of easing remains highly contingent on incoming data. The reports highlight risks that could pause the cycle: a rebound in inflation (especially in wages) or the easing of labor market weakness being deemed temporary.

1. Political Tail Risk: There is a tangible and rising risk of political interference eroding Fed independence. This represents a significant tail risk that could lead to a repricing of long-term U.S. financial assets if the Fed’s inflation-fighting credibility is compromised.

1. Market Environment: This catalyzes a environment conducive to lower front-end bond yields, a steeper yield curve, a weaker USD, and support for risk assets like equities and gold. However, this is tempered by the concerning economic data driving the policy change.

Everything About Trading

Euro / US Dollar Outlook

- Direction: Bullish

- Rationale: The primary driver is a profound shift in Fed policy expectations versus a steady ECB. The Fed is embarking on a cutting cycle due to labor market weakness, while the ECB is on hold, having declared the “disinflationary process is over.” This monetary policy divergence will narrow, reducing the USD’s interest rate advantage.

- Key Supporting Factors:
  - - Fed Dovishness: Markets price in 125-150bps of Fed cuts over the coming meetings. This will cheapen USD hedging costs from ~2.2% to ~1.0%, encouraging capital outflows and mechanically weakening the dollar.
  - - ECB Hold: The ECB held rates at 2.00% and revised its 2027 inflation forecast down to 1.8%. While dovish, the Governing Council’s rhetoric was hawkish, setting a high bar for future easing and supporting the euro.
  - - Technical & Flow Dynamics: The analysis notes the European Government Bond (EGB) market is seeing its first positive net cash flow, which is supportive for EUR assets. The pair was noted to be holding above 1.1700.

- Price Targets:
  - - Consensus Year-End Target: 1.2000 (explicitly stated by ING and Citi).
  - - Key Resistance Levels: 1.1800, then 1.1850.
  - - Key Support Levels: 1.1700, then 1.1650.

- Risks to the Outlook:
  - - A deeper-than-expected economic slowdown in the Eurozone, particularly if the French political crisis worsens and impacts broader confidence.
  - - If US inflation data surprises to the upside, forcing the Fed to delay its cutting cycle.

Gold Outlook

- Direction: Strongly Bullish

- Rationale: Gold is the standout beneficiary of the identified macroeconomic environment. It benefits from a potent combination of lower real yields (from Fed cuts), a weaker USD, and its status as a hedge against political and economic uncertainty.

- Key Supporting Factors:
  - - Fed Cuts & Real Yields: The imminent Fed easing cycle will push real yields lower, directly increasing the attractiveness of non-yielding gold.
  - - USD Weakness: A weaker dollar makes gold cheaper for holders of other currencies, boosting demand.
  - - Geopolitical & Political Risks: Ongoing trade tensions and significant political pressure on Fed independence (e.g., the Lisa Cook case) enhance gold’s safe-haven appeal.
  - - Inflation Hedge: While current inflation is muted, the risk that tariffs prove more persistent than expected supports gold’s role as a long-term store of value.
  - - Technical Breakout: The metal recently touched record highs above $3,670 before consolidating. The technical structure is described as bullish, albeit in overbought territory.

- Price Targets:
  - - Forecast Levels: Scotiabank explicitly forecasts gold to rise to $3,250/oz in 2025 and $3,400/oz in 2026.
  - - Near-Term Technical Targets: A break above consolidation could target $3,720.
  - - Key Resistance: Record high of $3,670, then the psychological $3,700 level.
  - - Key Support: $3,600 (psychological), then $3,550 (previous resistance).

- Risks to the Outlook:
  - - The primary risk is a hawkish surprise from the Fed that halts the cutting cycle before it begins, which would boost the USD and real yields, negatively impacting gold.
  - - A sharp, sustained improvement in global risk sentiment that reduces safe-haven demand.