NFP to Guide Fed's Final Rate Decision

Job creation in November is expected to have normalised, with the underlying components providing impetus for the Fed to reduce its rate for the final time this year.​

Return to Normality

The October NFP data were unusually low due to external factors, such as the impact of two hurricanes and uncertainty ahead of the upcoming election results. These factors were mainly resolved by November, meaning the upcoming data could show a distortion in the opposite direction, with the number of jobs growing faster than the general trend to compensate for October. Consequently, traders might overlook the headline number and focus on the components that show how tight the labour market is for clues about the Fed's actions at its final meeting. The chance of a 25 basis point cut has fluctuated between two-thirds and three-quarters since the election, as the markets waver over how much emphasis the FOMC will place on the labour market versus inflation.

The consensus is that the US added 214,000 jobs in November. Adding the 12,000 reported for October implies a monthly average of 113,000, a result not too far from the average since the summer, which showed enough softness in the labour market to prompt the Fed to start with a 50 basis point cut in September. It was seen as a "catch-up" cut following the poor data prints in June and July (both above the expected October-November average). Although it lost most of its predictive capacity, the ADP employment survey released Wednesday underperformed expectations slightly. A disappointment in the job creation number would likely solidify the consensus for a rate cut, something that seems firmly on the table despite Fed Chair Jerome Powell saying there was no rush to ease thanks to a strong economy in his last public remarks ahead of the pre-rate decision blackout period.​

Good News is Bad News for Gold

The rise in gold prices had been a trend since the end of winter as investors expected rate cuts from the Fed. However, gold has faced challenges since the election due to expectations of higher rates as the economy expands. The latest data supporting this outlook, the October JOLTS released on Tuesday, showed a rebound in the job market. American employers opened 372,000 new jobs in October, while the number of layoffs decreased. Although analysts expect gold to recover in the long term as interest rates eventually ease at a slower pace than initially expected, there is a possibility that strong employment data on Friday could persuade the Fed to hold off on the final rate cut of the year.

The forecast for the component data is expected to remain unchanged, with the unemployment rate staying at 4.1%, the participation rate at 62.6% and average hourly earnings growing at an annual rate of 4%. However, significant outperformance in these indicators could signal that the initial softness in the labour market seen during the summer is resolving. This could prompt the Fed to shift its focus back to inflation concerns after the latest PCE figures showed that price growth remained persistently high.​

Gold in Tight Range, Imminent Breakout?

Gold has consolidated between $2,550 and $2,750 after declining from its record high of $2,800 per ounce. As the range narrows, the likelihood of a pennant or triangle pattern increases, suggesting an imminent breakout. Should the short-term swing points of $2,690 and $2,630 fail to hold, it could signal the start of a new short-to-medium-term trend for the yellow metal.

Source: SpreadEx / Gold

Key Takeaways

November job creation is expected to normalise after October's unusually low figures due to hurricanes and election uncertainty. The consensus is for 214,000 jobs added, implying a monthly average of 113,000 since summer - enough softness to prompt the Fed to cut. Strong employment data could persuade the Fed to hold off on the final rate cut for the year. At the same time, weak figures would solidify expectations for a 25 basis point cut, with gold prices facing challenges from higher rate expectations despite analysts expecting a long-term recovery as rates eventually ease at a slower pace.​