Investor sentiment is bearish overall, with caution stemming from deteriorating labour market conditions, volatility in bond yields, and fiscal uncertainties. Weak U.S. employment data has bolstered bets for a Fed rate cut. The nonfarm payrolls report showed only 22,000 jobs added in August and an unemployment rate rising to 4.3%. Bond yields declined which is what you would expect when the economy is weak and the central bank cut rates. However, this is not guaranteed, we have seen the bank of England cut interest rates five times in the past 12 months, yet UK Gilt yields are a multi-year highs. Rate cuts were made despite inflation staying above the target, as the Bank balanced persistent inflation with weakening growth and employment concerns.
The divergence between base rates and yields is due to various factors like the government is running large fiscal deficits and is borrowing heavily, and investors have doubts about the government’s willingness or ability to reign in spending. The bottom line is that investors demand higher yields for higher risk. The risk is that inflation accelerates. It is possible the same scenario plays out in the US.
The winner is gold, gold rallies when governments run large fiscal deficits, inflation is high and central banks cut interest rates.