Gold Market Awaits U.S. Jobs Data; Payrolls Growth Expected To Have Picked Up Again

New York (Oct 1)  A Friday economic report is expected to show that the U.S. labor market picked up again last month, but that doesn’t necessarily mean the U.S. dollar will surge and pressure gold in the process…unless the payrolls growth is way above expectations, analysts said.

Conventional wisdom is that strong labor data bolster the dollar against the euro since it heightens expectations for the U.S. Federal Reserve to start hiking interest rates next year, and this in turn would tend to hurt gold. But currency strategists say so much optimism in the U.S. economy has already been factored into the greenback that the currency may not extend its gains unless there is a massive beat of expectations.

If the dollar is subdued after the report, that should spell good news for gold since the yellow metal often moves inversely to the greenback, said Phil Flynn, senior market analyst with Price Futures Group.

“If there is a sense that the U.S. is going to be forced to raise interest rates because the jobs number is a blockbuster, that is going to give the dollar more strength and make it tough for gold to hold the $1,200-an-ounce area, which has been a big psychological area,” he said. “If the jobs number should miss big, that could really give gold a boost because the dollar would be under pressure.”

The third possible scenario – a jobs report that is right around expectations – also might be near-term supportive for gold, he continued.

“As-expected probably would not inspire the dollar to go to new highs,” he said, a view also listed by some currency strategists who spoke to Kitco News. Instead, this merely “would be reiterating the move” that has already occurred, Flynn said.
The monthly U.S. jobs report, often viewed as the most significant economic indicator for the world‘s No. 1 economy, is scheduled for release Friday at 8:30 a.m. EDT. Expectations compiled by various news organizations are for around 205,000 to 220,000 new jobs.

In particular, traders will be watching to see if softer jobs growth in August was a one-time hiccup or if the pace of hiring is slowing. The Labor Department reported 142,000 new jobs in August after increases of 212,000 in July and 267,000 in June. The unemployment rate is expected to hold at 6.1%.

A report from payrolls processor ADP Wednesday said 213,000 private-sector jobs were created in the U.S. during September.

“I think the disappointment in August, when payrolls rose just 142,000, was just a temporary blip in an otherwise strong upward trend,” said Paul Dales, senior U.S. economist with Capital Economics.

Otherwise, economic data as a whole suggest the U.S. economy “is very healthy and is strengthening,” Dales continued.

“So I think the payrolls will probably rise by around 225,000 in September,” he said. “That would be really consistent with a reasonably healthy labor market. I think this report on Friday should be good news for the U.S. economy.”

Mark McCormick, forex strategist with Crédit Agricole Corporate & Investment Bank, said his firm looks for jobs growth in line with consensus expectations, around 215,000.

“We think we’re going to see some pickup from the previous month, when we had 142(,000),” he said. “Services and manufacturing are expected to pick up after weakness in August.”
Statistically, there is potential for the August jobs number to be revised upward, said Marc Chandler, head of currency strategy with Brown Brothers Harriman. However, he is among those who are looking for some “disappointment” in the September payrolls figure, with a figure below 200,000.

“In something like 17 of the last 19 years, the August data has been revised up,” Chandler said. “And we had a weak August number. But, in six of the past nine years, September has come in lower than August.”

The economy grew 4.6% in the second quarter, the fastest pace since the fourth quarter of 2011. Expectations are for the just-ended third quarter to have been above-trend as well, Chandler said. “So I look for a return to trend growth in Q4,” he said. And that, he continued, could mean some softening in the labor market.

“For me, the sign for that is that the weekly initial jobless claims bottomed in July,” Chandler said. “That’s the low point in the cycle.”

Generally, he suggested, markets might have become “too optimistic” on the U.S. economy.

Overall, Chandler and McCormick described the medium- to longer-term fundamental backdrop as favorable for the U.S. dollar. Much of this is because of “bad things happening” in other economies like Europe and Japan, Chandler added.

However, both said some topping action could be occurring in the greenback. In particular, Chandler cited the euro’s ability to hold above Wednesday’s low despite more soft European economic data.
McCormick described the dollar as “overbought” in the short term, therefore susceptible to a short-term pullback on an as-expected jobs report.

“The dollar has advanced rapidly and so quickly on the back of potential normalization of Fed policy, or the first rate hike in mid-2015…,” he said. “Our concern is technical indicators and positioning both suggest the dollar is overbought at this point….We have the dollar index 3% above short-term fair value, when we start using sub-financial market indicators and interest-rate spreads and the outlook for monetary policy.”

The greenback would likely need a “big upside surprise” in the jobs data to maintain upward momentum in the near term, he added.

Chandler pointed out that futures traders have large short positions in the euro and yen. That means a softer-than-forecast U.S. jobs report means potential for short covering in the euro and yen, which in turn means a pullback in the U.S. dollar.

Flynn pointed out that gold has shown some resiliency lately by hanging onto the $1,200 level despite recent dollar gains.

“The question becomes at what point, with the rally in the dollar, do we see a diminishing impact on gold?” Flynn said. “We know there is a very strong (inverse) relationship. But at some point, the fundamentals of gold are going to come into play. You may see less of that one-to-one relationship (to the dollar) that we’ve seen…partly because there are other reasons to be long to gold.”

In particular, he cited geopolitical uncertainties, such as pro-democracy protests in Hong Kong and Middle East tensions surrounding ISIS.

Source:  FORBES