Gold Ticks Up Ahead of Today’s US NFP Data

Markets are in a holding pattern ahead of crucial risk events this week, as upcoming jobs data may test the Fed's hawkish pivot.

The Key Points For Gold

• Analysts are expecting the US jobs market to cool, with a median forecast of 110K jobs, down from 172K a month earlier.
• Warsch stuck to his strong rhetoric on inflation during his appearance at the ECB Forum in Sintra, affirming the Fed's hawkish pivot.
• The market is mostly pricing in a rate hike by the end of the year, not fully convinced that Warsh is breaking with Trump's dovishness.
• A breakout in jobs numbers would likely be a bigger surprise to the market and could reverse recent gains in gold prices.

Fed Sticks To Hawkish Stance

June NFP figures will be released a day early this week, on Thursday, as US markets are closed for a holiday and set the tone for the extended weekend. Markets have increased the odds of a Fed rate hike this year after new Fed Chair Kevin Warsh shifted the Fed toward greater concern about inflation. Futures see over an 80% chance of a 25 bps interest rate hike by the end of the year, higher than before Warsh took the top job at the Fed. However, markets are still not fully convinced that the Fed will go through with the hike, thinking it might be relying on rhetoric to bring down inflation amid an uncertain economic moment. After all, Warsh was appointed by the notoriously dovish US President Donald Trump, who has insisted that rates should go down. If that were the case, he would need an excuse to hold off on hikes while inflation was still above target, and that excuse would be the labour market. Job growth slowed substantially last year and was the justification for lowering rates. However, over the last three months, the market has rebounded to "normal" hiring levels, surprising economists.

Analysts are once again predicting softer jobs numbers, with the consensus for June NFP to fall back to 110K from 172K in May. Meanwhile, the unemployment rate is anticipated to stay unchanged at 4.3%. This is consistent with a low-turnover labour market, where the number of job openings, hirings, and firings has remained relatively stable. In terms of the impact on monetary policy, it means the market is neither tight nor slack, reducing potential inflationary pressure because salaries aren't rising significantly above consumer prices.

Gold Holding Out For A Miss

If the beat exceeds expectations, it would imply a more resilient labour market than analysts currently expect, which could be the catalyst for fully pricing in the rate hike. Warsh, as recently as yesterday, continued to stick to strong rhetoric on fighting inflation, and this case would be substantially bolstered if the economy remains resilient amid solid jobs growth. While initially positive for the dollar, a rate hike would likely weigh on gold and reverse its recent gains above $4,000. On the other hand, a miss of expectations might not have as much of an impact on the market, particularly gold, which has been rising amid anticipation that the number will disappoint. Predictive markets are pricing in a disappointment, which might foreshadow the market reaction. That is, unless there is a large enough drop in new hires to substantially reduce the odds of a rate hike, which would support gold. 

Gold Biased Up Ahead of NFP, But in Consolidation

The recent bounce from below $4K at $3945 briefly brought gold prices back above $4100, but the upper Bollinger Band rejected bulls, and the yellow metal now appears to be consolidating. A break above the upper BB could extend to $4200, the next major swing resistance. Conversely, a more hawkish interpretation of the jobs data could see gold retreat below $4K again, bringing the lower BB at $3965 into play and exposing $3900.

Source: SpreadEx | Gold, 4-hour Chart