US December NFP Expected to Show Improvement

The US labour market is projected to show a modest decline in December data, but with significant slack as traders try to time the Fed's next rate cut.

The Key Indicators

• The US December NFP is projected to hold pretty steady at 60K jobs added, with the unemployment rate improving to 4.5%.
• Traders are looking to see if the slack in the jobs market continues to justify further Fed easing despite inflation being above target.
• Gold prices, which are trying to make headway amid geopolitical tensions, would benefit from signs that Fed officials remain concerned about the labour market.

Has the US Jobs Market Hit Bottom?

Friday will mark the first on-time NFP report since the start of the US government shutdown in October, and with the odds of a March rate cut evenly balanced, it could be pivotal for the markets. Some analysts suggest it could be the strongest jobs report in months, while others project continued weakness, amid a wide range of views on what to expect. NFPs haven't breached the 110K level in seven months. Traders will be looking for signs that the jobs market remains weak enough to justify further Fed easing despite inflation above target. This creates a scenario in which good news is bad news: a stronger-than-anticipated job market would mean less easing from the Fed, weighing on equities and gold.

The consensus is for a near repeat of the prior month, with December US NFP expected at 60K compared to 64K in November. Meanwhile, the unemployment rate is projected to improve slightly to 4.5% from 4.6% previously. Last month's report included some data from October, but the October unemployment rate was omitted due to the government shutdown. However, the jump from 4.4% joblessness in September to 4.6% in November was consistent with a one-decimal uptick per month, which had been maintained since June.

Any results below 4.7% would imply a break in the trend and could lead to speculation that the labour market has hit bottom. Typically, the Fed focuses more on the unemployment rate than the headline NFP number. However, markets are closely watching job creation to understand the evolution of the US economy better, and estimates suggest more than 180K jobs are needed to reach replacement level. Even the most optimistic projections for the December data are below that level, indicating a broad consensus that the US labour market continues to show substantial slack.

Gold and the Fed Outlook

Ahead of the release of the jobs data, gold prices are attempting to reach a new record high amid safe-haven demand driven by geopolitical tensions. As the situation in Venezuela stabilises, traders now have Greenland to worry about, amid rising diplomatic tensions between the US and the EU. After two weeks without Fed speakers, traders are looking for commentary to provide insight into the balance of hawks and doves and how concerned FOMC officials are about the jobs market. Attention is also returning to the appointment of a new Fed Chair, which US President Donald Trump had teased for early January before headlines were occupied by Venezuela. All of that could affect the timing of the next rate cut, with upside for the yellow metal contingent on traders becoming more convinced that the Fed will ease in March.

Gold Bottomed Out, But Still Fails iH&S Target

Gold failed to cross past $4,510 earlier in the week, forming local resistance below the record peak of $4,585. However, a possible inverse head-and-shoulders pattern, with the head at $4,285 and shoulders at $4,320, brings into focus the measured-move high of $4,550. This makes the neckline peak at $4,420 all the more important as support, as a decline back into the H&S territory would raise the risk of deeper corrections unless buyers step in early. In this case, gold may form a pennant or triangle or simply continue higher. But if the support holds firm, gold may have already bottomed out.

Source: SpreadEX | Gold, 1-hour Chart