Weak jobs number brings rates down

The August jobs report showed a sharp slowdown in hiring, with only 22,000 jobs added—well below consensus estimates of 70,000–75,000. The unemployment rate rose to 4.3%, the highest since 2021, suggesting the labor market is finally cooling after years of resilience. Markets responded quickly, with traders increasing bets that the Federal Reserve will cut rates at its next meeting, with some even pricing in the possibility of a 50-basis-point move. This weaker-than-expected report strengthens the case for monetary easing and raises questions about the durability of consumer demand heading into year-end. For investors, it signals a potential turning point in both policy and economic momentum.

• The labor market has been showing signs of slowing for several months
• We now have several consecutive weak prints, showing that a trend is almost certainly there
• With revisions, June actually had a decline of 13,000 jobs, the first since 2020
• The economy needs to create roughly 100,000 jobs a month to account for population growth
• The most significant market move following the news was that interest rates came down significantly
• The 10-year is currently trading at 4.07%, down significantly from 4.8% at the beginning of the year
• This is likely going to be very positive for mortgage rates, as they are largely set off the 10-year yield
• The market reaction seems to indicate that the market was pretty certain about a 25 bps rate cut in September
• Unless we get a very bad CPI (inflation) number next week, it is not unreasonable to expect a potential 50 bps rate cut at the Fed’s next meeting

Broadcom flexes AI muscles

Broadcom delivered blowout earnings this week, reporting a 22% jump in revenue to $16 billion and raising forward guidance well above Wall Street expectations. A big driver was AI, with sales in that segment up 63% year-over-year, including a reported $10 billion custom chip order believed to be from OpenAI. The stock surged more than 10%, pushing Broadcom’s market cap above $1.6 trillion and underscoring its growing role in AI infrastructure. Nvidia, meanwhile, sold off on the news, as investors worried that Broadcom’s rise in custom silicon could challenge Nvidia’s dominance in the space. While the two companies don’t compete across the board, Broadcom’s success illustrates how hyperscalers are diversifying their hardware suppliers, creating more competitive tension in the AI race.

• Thus far, the biggest beneficiary of the AI boom has undeniably been Nvidia
• Nvidia’s stock is up nearly 10x since the launch of ChatGPT
• Nvidia makes the GPUs (graphics processing units), which are necessary to train AI models
• Broadcom is known for providing semiconductors for networking (Wifi, Ethernet, Bluetooth, etc.)
• They have recently gained traction with ASICs (application-specific chips) which they customize for their customers
• The news of OpenAI potentially paying $10bn for ASICs signals that the Generative AI companies may be experimenting with different ways to move forward
• ASICs can offer better cost/power efficiency by being designed for specific use cases

Gold marches higher on politics and policy

Gold prices climbed above $3,600 per ounce this week, putting the metal on track for its best performance in three months. Expectations of Fed rate cuts, along with rising political and geopolitical uncertainty, have fueled strong safe-haven demand. Year-to-date, gold is up more than 25%, supported by central bank buying and a weaker U.S. dollar. Goldman Sachs raised its forecast to $3,700 by year-end, with the possibility of $4,000–$5,000 if investors accelerate flows into the asset. The rally underscores gold’s renewed role as a hedge against both monetary and political risk in an increasingly uncertain environment.

• Many traditional investment philosophies dismiss gold, given that it does not generate cash flow (and actually incurs storage costs)
• However, since the US dollar went off the gold standard in 1971, gold has been a compelling tool to protect against the falling value of the US dollar
• This has been particularly true during the easy monetary environment since the Global Financial Crisis
• We expect gold to continue to benefit from this dynamic for the foreseeable future, particularly given US fiscal deficit spending, which could continue to put pressure on the value of the US dollar

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