US May Non-Farm Payrolls To Ease Amid Fed Hawkishness

The job market in the US is expected to cool a bit in May, keeping the Fed on an even keel for the first policy meeting led by Kevin Warsh in a couple of weeks, but bets on a hike are rising.

The Key Factors That Could Move the Markets

• The consensus is for May US NFP to cool to 85K from April's 115K, with the unemployment rate expected to stay unchanged at 4.3%.
• The market has been upping its bets that the Fed will have to hike rates this year amid a labour market recovery.
• The gold price has come under pressure as the new Fed Chair emphasises concern over inflation.

Hike Odds Up as Labour Market Recovery Falters

Friday's NFP release is one of two major data points likely to shape expectations for the Fed's June meeting in two weeks. Over the last two months, the US labour market has shown signs of recovery, with job adds in the triple digits and well above expectations. This undermined dovish arguments for easing and, as inflation pressures increased, keeping rates on hold. Gold prices have risen along with bets that the Fed will have to raise rates, despite the arrival of a supposedly dovish Trump appointee at the next meeting. Markets could be particularly sensitive to Friday's data release, given the uncertainty around what changes Keven Warsh will institute at the Fed.

After inflation rose to 3.8% in April, well exceeding the Fed's 2.0% target, markets are now pricing in an almost 60% chance of a rate hike by the end of the year. This was supported by the April JOLTS report released on Tuesday, which showed a slight uptick in the number of open jobs, while hiring and firing declined. The results suggest growing tightness in the labour market, which could be compounded if the upcoming May NFP beats estimates again. If that were the case, it could signal an acceleration of the US economy, putting the onus on the Fed to hike rates to bring inflation under control. After all, Fed Chair Warsh has repeatedly said that inflation is the Fed's responsibility, suggesting he's more concerned about consumer prices than the labour market. However, he's also pointed out that the increase in the monetary base is the largest culprit, not lower rates, and that this could imply the need for alternative policy measures.

Gold Under Pressure Ahead of NFP

In either case, it would be negative for gold if the job numbers beat estimates by a wide margin, as it would increase bets of higher rates. The consensus is that May NFP will come in at 85K, down from the 115K a month earlier. Meanwhile, the unemployment rate is anticipated to stay unchanged at 4.3%. If NFP were to come in higher than the prior month, it would likely be substantially higher, weighing on gold prices while boosting the dollar. However, a dovish outcome where NFP is below 70K and prior months are revised downward could be a bigger surprise to the market and give gold a boost if futures move to price out a rate hike this year.

Gold Pennant Squeeze Suggests Breakout

Gold has failed to move past the middle VWAP near $4600/oz, leaving behind resistance at $4750 and the upper VWAP at $4660. With the indicator suggesting a squeeze, a breakout could be imminent. If the lower trendline and VWAP give way to bears, the next support above $4100 lies at $4250. On the flip side, a bullish scenario could see prices extend to as high as the recent swing of $4750, which may or may not lead to further upside, given that prices are contained within a pennant-like pattern.

Source: SpreadEX | Gold, Daily Chart