CITIC Securities: Non-farm payroll strengthens September rate cut expectations, precious metals break through resistance levels

According to the Wise Finance APP, CITIC Securities released a research report stating that although the newly added non-farm employment in the United States in June was slightly better than expected, the total number of newly added non-farm employment in April and May was revised down by 111,000. At the same time, the unemployment rate was 4.1%, higher than the previous value and the expected value, continuing the cooling trend in the U.S. labor market, boosting investors' expectations of a rate cut in September. Interest rate observation tools show that the probability of a rate cut in September exceeds 80%, and the number of expected rate cuts within the year has been revised to 2 times. This revision in expectations has led to a decline in U.S. bond yields, which is favorable for boosting precious metal prices. From the perspective of nominal and real interest rates being at high levels, a rate cut is expected to have a strong impact on precious metal prices.

Key Points from CITIC Securities:

Industrial Metals:

This week, the price changes of LME copper, aluminum, lead, zinc, and tin were 4.0%, 0.9%, 0.9%, 2.0%, and 3.4% respectively. The prices of industrial metals are jointly determined by their "financial attributes" and "commodity attributes". From a financial perspective, on May 1st, the Federal Reserve announced that it would maintain the federal funds rate target range at 5.25% to 5.5%, in line with market expectations. The Fed's rate hikes are coming to an end. From a commodity perspective, global copper and aluminum inventories are relatively low, the Chinese economy is expected to recover, and with the boost from the new energy industry, expectations for copper and aluminum demand growth have significantly improved.

Rate Cut Expectations Revised, Boosting Precious Metal Prices

1. The cooling trend in the U.S. labor market provides the possibility for a Fed rate cut. Data from the U.S. Department of Labor on July 5th showed that the U.S. added 206,000 new non-farm jobs in June 2024, higher than the market's expected 190,000, but lower than the previous 218,000. The total revision of new non-farm data in April and May was 111,000 lower than expected, with a total of 326,000 new jobs added in the two months, below the market's expectation of 420,000. Meanwhile, the labor participation rate rose to 62.6%, the unemployment rate rose to 4.1%, the labor supply-demand gap further narrowed, and the cooling trend in the job market provides the possibility for a Fed rate cut. The expectation of a rate cut in September has increased to 80%, and the expected number of rate cuts within the year has been revised from 1 to 2.

2. The expectation of a rate cut has been brought forward to September, and the pace of inflation decline determines the pace of rate cuts. In May, the U.S. CPI was 3.3% year-on-year, and the core CPI was 3.4%, both lower than expected. Historically, the two key conditions for the Fed to cut rates are that the three-month average of CPI and core CPI is below 3.5%, and non-farm employment is below 150,000. Currently, these conditions are close to being met. If the data in the next two months does not change, the possibility of a preemptive rate cut in September is rapidly increasing. Since the last rate cut by the Fed in July 2023, the real interest rate in the U.S. has remained around 2%. Powell has repeatedly stated that the policy is sufficiently restrictive, indicating that a 2% real interest rate is likely what the Fed desires. This means that the pace of rate cuts is likely to be consistent with the pace of inflation decline. Market estimates suggest that there is a space for CPI to decrease by 0.3-0.5%, corresponding to 1-2 rate cuts

3. Expectations of lower interest rates are favorable for precious metal prices. The unexpected surge in May non-farm payrolls led to a revision of the number of interest rate cuts by the Federal Reserve from 2 times to 1 time this year, and the cessation of gold purchases by the People's Bank of China caused a decline in gold prices. Now, with the increase in expectations and anticipation of interest rate cuts, precious metals have regained their upward momentum. During the period before the interest rate cuts, the upward trend in precious metal prices remains unchanged, and it is recommended to hold assets related to precious metals.

Risk Warning

1. A significant global economic recession leading to a cliff-like contraction in consumption. The World Bank's latest "Global Economic Prospects" report predicts global GDP growth rates of 2.6% in 2024 and 2.7% in 2025. The institution believes that with inflation slowing down and growth stabilizing, the global economy is on the path to a soft landing, but risks still exist. Economic data in Europe and the United States has shown a downward trend, and a deep recession would have a huge impact on the consumption of non-ferrous metals.

2. Uncontrolled inflation in the United States, unexpected tightening of monetary policy by the Federal Reserve, and a strong US dollar suppressing equity asset prices. The United States is unable to effectively control inflation and continues to raise interest rates. The Federal Reserve has already carried out significant consecutive interest rate hikes, but services, especially rents and wages, have shown stickiness constraining the decline in inflation. If the Federal Reserve maintains a high-intensity rate hike, it will be unfavorable for non-ferrous metals priced in US dollars.

3. Slower-than-expected consumption growth in the domestic new energy sector, and continued sluggish consumption in the real estate sector. Although policies on the sales side of the real estate sector have been relaxed to varying degrees, the willingness of residents to purchase is insufficient, and the resolution of debt risks for real estate companies is progressing slowly. If sales do not improve continuously, the completion side of the real estate sector will face risks of slowing down later, which is unfavorable for the consumption of certain non-ferrous metals domestically