Softening Jobs Market Could Defers Fed Tightening

More softening is expected in the jobs market, which is seen as keeping the Fed from going through with more tightening.

Finding the Right Balance

As core inflation continues to fall, investors are looking for when the Fed will finally admit that there won't be any more hikes. Then, there will be a discussion about when the next rate cut can happen in earnest. A labour market that keeps creating jobs but eases up on the pressure on costs would help contribute to the hopes that the US can find that Goldilocks spot where the economy slows enough to bring down inflation but not too much for a recession. With the market convinced that the Fed won't go through with a final rate hike, a miss of expectations is more likely to align with the market. But given the downward revisions in jobs data over the last several months, a major surprise to the upside might fade rather quickly.

The Fed is already in its pre-meeting blackout period, so we can't expect any further clarification from its officials after the release of the jobs numbers and inflation figures next week. Markets will have to react to the data. The pre-NFP indicators have already provided signs that the results won't surprise to the upside (meaning that if there is a beat, it will be a bigger surprise). ADP's labour survey was also below expectations and the prior month. The JOLTS survey was not only well below expectations (showing a 617K decline in job openings in October), but the prior month was also revised lower.

Expectations and Potential Reactions

The consensus among economists is for a modest rise in the number of jobs created in November to 160K, compared to 150K in October. That is seen as keeping the unemployment rate unchanged at 3.9%, considering an unchanged (expected)  participation rate. Average hourly earnings are expected to rise at a monthly rate of 0.2%, also unchanged from the prior month.

The dollar has been one of the bigger casualties of the pivot in expectations about the Fed. In the latest poll, economists see the first rate cut happening in July. The weaker dollar has naturally boosted the price of gold lately, on top of continued buying by central banks. Weaker than anticipated jobs data in the US would likely incline the possibility of the Fed starting its cut cycle sooner than currently anticipated, which could accelerate gold prices upwards. On the other hand, too much of a surprise could bring back worries of a recession and restart safe haven flows, which often benefit the dollar more.

Gold Still in Upward Trend

Gold's price has reversed engulfing after hitting a new record high at 2150 but has not yet retested the 2020 resistance to support. While above there, the entire upward leg remains impulsive, pending further upside past  2070 so long the trend maintains its bias. With price discovery back on the table above the peak, 2200 and the subsequent round levels will be in focus. Sliding outside the acceleration channel would simply additional pressure, opening the door to 1935.

Source: SpreadEx / GOLD

Key Takeaways

Data prior to the NFP suggest a softening jobs market that may delay further tightening as core inflation falls. Weaker than expected jobs data may prompt an earlier start to the Fed's rate cut cycle, boosting gold prices. However, a significant surprise could raise recession concerns and benefit the dollar.