Can Gold Recover from Friday's Strong Payrolls Hit? / Commodities / Gold & Silver 2019

And here we go again. Gold slipped below $1,400 perounce. This is where it fell after stronger-than-expected June EmploymentReport. How does that key piece of economic data play into the market’s ratecuts expectations? And how does it all impact gold?

June Payrolls Surpass Expectations

The U.S. created 224,000 jobs in June, followinga disappointing increase of 72,000 in May (after a downward revision). Thenumber surprised positively, as the economists polled by the MarketWatchforecasted 170,000 created jobs. The gains in hiring last month werewidespread, but with a leading role of education and health services (+61,000)and professional and business services (+51,000). Only retail trade and miningcut jobs.

However, the strong headline number was accompaniedby downward revisions in May and April. Counting these, employment gains inthese two months combined were 11,000 lower than previously reported.Consequently, job gains have averaged 171,000 per month over the last threemonths, which is lower than not so long ago (in 2018, the average gain was223,000 per month).

So, the pace of hiring has slowed, as the chartbelow shows. But the economy is still creating jobs at a reasonable pace. TheU.S. labor market is likely to further contribute to the longest expansion onrecord. What is crucial here, is that the nonfarmpayrolls rebounded in June from May, calmingworries about the health of an economy. Goldbulls surely aren’t cheering that.

Chart 1: U.S. nonfarm payrolls (red bars, left axis, changein thousands of persons) and the annual growth in average earnings in theprivate sector (green line, right axis, %) from June 2014 to June 2019.

Wage Growth Flat, while Unemployment Rate Rises

What about the other indicators? The averagehourly earnings for all employees on private nonfarm payrollsrose by 6 cents to $27.90, which means a3.1 percent increase over the last twelve months. The rate of wageinflation was unchanged from May, although slower than at the beginning of theyear, as the chart above shows.

Importantly, the unemployment rate edged up from 3.6 to 3.7 percent, as one cansee in the chart below. Should we be worried? On the one hand, the unemploymentrate is a powerful recession indicator, so its rise might be worrisome.

Chart 2: The unemployment rate U3 from June 2014 toJune 2019

On the other hand, the indicator is still near a50-year low. And it increased amid more people looking for a job. More than300,000 people entered the labor force in search of work in June, lifting theparticipation rate from 62.8 to 62.9 percent. Hence, we believe although thedevelopment of the unemployment rate requires attention, the recent rise is not a point of concern yet. It is still belowthe natural unemployment rate, and the Sahm’s indicator we analyzed in detailin this month’s edition of the Market Overview, does notflash alarm. Gold bulls better be patient.

Implicationsfor Gold

What does it all mean for the gold market? The June Employment Report was strongerthan expected. The unemployment rate edged up, but it was caused by morepeople entering the labor force, so it should not be a point of concern yet.The nonfarm payrolls surpassed expectations, easing concerns about the state ofeconomy that emerged after the weak May report.

Consequently, investorsscaled back bets of an aggressive interest rate cuts. This is exactly whatwe predicted on June 2, writing in the Gold News Monitor:

A 50 basispoints cut is definitely excluded, although the markets still see more than 20 percentchance of such a move. So, the expectations for the Fed cuts could weakensomewhat or shift to September or later this year. All this seems to be negative for the gold prices.

Indeed, the markets still expect one 25-basis points interestrate cut in July, but now the odds of a 50-basis points reductionsamount only to 6 percent, compared to 25 percent one week ago. As investorsadjusted finally their overly dovishexpectations, the bond yields jumped,while the price of gold dived againbelow $1,400.

Now, what next? We believe that even 25-basis pointscut is not justified by the economic outlook. And the precious metals investors should not downplay the possibility thatthe Fed would end up delaying the cut andpushing back its dovish perception, in part to show its politicalindependence from the White House. However, because of the Wall Street’saddiction to loose monetarypolicy, the FOMC could beforced to cut the federalfunds rate at its next meeting. The Powell’s testimony in Congress this weekshould provide us with more clues about the current Fed’s stance. Staytuned!

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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