Non-Farm Data Influences Fed Rate Cuts; Gold Bulls Eye New Surge?

If employment growth falls below this threshold,expectations for another 50 basis point rate cut by the Federal Reserve may gain new life,and gold could potentially return to its historical highs...

The employment situation in the United States for September is expected to be close to that of August.Since earlier this year,hiring has gradually slowed down,wages have risen slightly,and the labor market appears to be very similar to what many policymakers anticipated.

According to the consensus forecast of economists,the number of new non-farm jobs in September is expected to decrease slightly from 1.42 million in the previous month to 1.4 million,with the unemployment rate remaining stable at 4.2%.In terms of wages,the expected year-over-year growth rate of average hourly earnings is expected to remain unchanged at 3.8%,with a month-over-month increase of 0.3%,slowing down from 0.4% in the previous month.

If the data meets expectations,this will be close to an optimal scenario,allowing the Federal Reserve to continue to cut interest rates without worrying about the risk of falling behind the curve and causing an economic recession.

Katie Nixon,Chief Investment Officer at Northern Trust Wealth Management,said: "The job market is slowing down,and the tension has eased.The balance of power has shifted towards employees,which will definitely alleviate wage pressure,and wages have always been a key component of inflation.Our team has been expecting a soft landing for some time,and now it looks like a soft landing."

Of course,the non-farm reading can always have a huge upside or downside surprise.In addition,monthly revision data sometimes also shows significant changes.For example,during the 12-month period ending in March 2024,the U.S.Department of Labor overestimated the number of hires by more than 800,000,adding uncertainty to labor market analysis.

However,Goldman Sachs analysts believe that seasonal distortions may have put pressure on the latest two employment data,so the increase in employment in August may be revised upward.Since 2010,the average increase in employment in August has been revised upward by 67,000 people,with about two-thirds usually occurring in the first revision.

The U.S.Bureau of Labor Statistics will release the report at 8:30 PM Beijing time on Friday.Although there will still be a non-farm employment statistics before the general election voting next month,it is expected that the October report will be distorted due to the impact of dockworkers' strikes and Hurricane Helene,making the September non-farm report the last "clean" employment data before Election Day.

Mixed cluesIn the past few months,labor market indicators have been on a downward trend,but they are far from falling off a cliff.Surveys in manufacturing and services show a slowdown in hiring,while Federal Reserve Chairman Powell described the labor market earlier this week as robust but softening.

According to data from the U.S.Bureau of Labor Statistics,except for the brief downturn during the outbreak of the COVID-19 pandemic,the last time the monthly hiring rate reached this summer's level was in October 2013,when the unemployment rate was 7.2%.The monthly hiring rate in June and August this year was 3.3%.

Job vacancies have also decreased,reducing the ratio of vacancies to unemployed individuals from 2:1 a few years ago to 1.1:1.

At the same time,labor market mobility has slowed.Excluding the COVID-19 pandemic in 2020,the quit rate has never been lower than the current 1.9% since December 2014,and the layoff rate,including the pandemic period,last fell below the current 3.1% in December 2012.

Before the release of this week's non-farm employment report,other employment indicators were mixed.

For example,JOLTS job vacancies surged in August,rising from the revised 7.71 million in July to 8.04 million,higher than the expected 7.69 million.This is the highest level since May,indicating that the U.S.labor market is still tight.The data will support stronger-than-expected employment figures.

On the other hand,the employment component of the ISM manufacturing index slowed sharply in September.The employment sub-index of the ISM manufacturing index has historically been closely linked to the non-farm employment report.In September,its reading fell from 46 to 43.9,in a deep contraction range,one of the lowest levels since 2020.Initial jobless claims have been basically stable but have declined slightly in recent weeks,which supports the stability of the unemployment rate.

Will the Fed's stance waver?

The non-farm employment data for September will help shape expectations for the Fed's easing policy before the end of this year.Powell hinted this week that if economic data meet expectations,there will be a 25 basis point rate cut in November and December this year.Compared to market pricing,this is a hawkish view.This guidance and the better-than-expected ADP data have led the currency market to re-tilting towards a 25 basis point rate cut in November,with the current probability priced in at over 60%.

Goldman Sachs Chief Trader John Flood stated that after the ADP data came in better than expected,expectations for the non-farm payrolls data have climbed to 175,000.

Nonetheless,if the data indicates a significant weakening,the market's expectations for the Federal Reserve to cut rates by another 50 basis points could be reignited.Atlanta Fed President Bostic previously stated that a figure below 100,000 would raise concerns.

JPMorgan Asset Management Chief Global Strategist David Kelly believes that "a strong number won't really change their stance.A weak number might tempt them to cut rates by another 50 basis points." However,Kelly also added that the Fed is more likely to view the employment situation as "unclear" and not be led solely by a single data point.

JPMorgan economist Nora Szentivanyi forecasts that the U.S.non-farm payrolls for September will increase by 125,000,showing that labor demand is still slowing down,suggesting that the Fed could still possibly cut rates by 50 basis points in a single move."If the data is around 100,000,it would raise the possibility of a significant rate cut."

Another Goldman Sachs analyst,Rich Privorotsky,stated that the impact of the non-farm payrolls data should be straightforward,as good news is good news and bad news is bad news."A reading below 100,000 would raise concerns about the Fed falling behind the curve again,and the best second-best scenario would be slightly better than expected but not very strong,i.e.,below 200,000."

Is gold poised to reach a new historical high?

Before the showdown of the U.S.non-farm data,some traders took advantage of the recent rebound in the dollar to take profits and adjust positions.After the U.S.Dollar Index touched a six-week high on Thursday,it fell back in early trading on Friday.

Bets on aggressive easing by the Fed have weighed on the price of interest-free gold,but escalating geopolitical tensions between Iran and Israel have kept the downside for gold prices still limited.The next direction of gold prices will depend on the upcoming release of non-farm employment data.An unexpected upside in job growth and wage inflation data may support bets on the Federal Reserve cutting interest rates by 25 basis points in November,adding extra momentum to the dollar's recovery,thereby pressuring gold prices.In contrast,if the results are a major disappointment,expectations for the Federal Reserve to make a significant rate cut at the next meeting may resurface,dealing a comprehensive blow to the dollar.In this scenario,gold prices could rebound to the historical high of $2,686.

Fxstreet analysts point out that the short-term technical outlook for gold prices remains largely unchanged,with buyers maintaining momentum as long as the 14-day Relative Strength Index (RSI) stays within the bullish territory.The leading indicator is currently trading near 68.

Gold prices need to close above the static resistance level near $2,670 to gain new upward space.The next resistance level is at the historical high of $2,686.Should the prices rise further,bulls will target the round figure of $2,700,followed by the ascending trendline resistance,currently at $2,752.

On the other hand,it is crucial to hold the September 24 low of $2,623 before descending to the threshold of $2,600 (which coincides with the 21-day simple moving average).