Gold prices are well on track to record another week in positive territory, as the bar was set way too low for the US NFP number. The data has brought mixed messages for the market players, but smart money is pretty confident about one thing, as one can see in the gold price. Here is more on this.
Background
Ahead of the US NFP data, the shinning metal’s price has been well on track to record two consecutive weeks in positive territory. If you look at the weekly performance for the gold price, shown on the chart below, the gold price was actually scoring the best weekly gains since May this year. The chart below illustrates significant price levels over a weekly period.
The majority of this has happened as a result of traders and investors closely monitoring US economic data and Fed Chairman Jerome Powell's remarks.
Basically, the biggest data point that has supported the narrative for the gold price this week has been the PMI manufacturing number, which fell into contraction territory. Manufacturing PMI falling into contraction territory is a big deal for market players because this gives the Fed no right to maintain their bias about the US economy. So far, the Fed has been of the view that things are rosy for the US economy, everything is on track, and there is no urgent need for them to react with respect to their monetary policy. However, the PMI manufacturing numbers have brought a big reality check to the Fed, and the only choice that they have now is to either act or face more weakness in the economy.
Does the US job data support the gold price?
The US labour market has been giving up mixed signals throughout this week. For instance, if you pay attention to the JOLTS data, the Weekly Jobless Claims number, and the US ADP print, In those numbers, I think the only good news for the Fed was the slowdown in the US wage growth number, which is certainly music to everyone's ears. Basically, no one wants to see inflation spiralling upward, and this could become an actual possibility if the wage growth number continues to rise—after all, businesses would have no choice but to pass the cost to consumers, and all of this impacts the inflation number and the Fed’s decision.
Now, look at the US ADP number. Most traders have had this in mind as the base case scenario that today’s number isn’t going to be great at all. The forecast for today's number was 191K, while the previous number was 272K. In numerous aspects, the threshold was significantly lower than the preceding figure. The printed number, however, was 206K. Therefore, the unexpectedly high number did not bode well for the gold price, which is why the actual price action was negative.
What Is the Important Ingredient in Today’s US NFP Number?
We already set the bar significantly lower than the previous number, so the fact that the actual number exceeded our expectations wasn't a significant surprise. The actual factor that matters most for today's number is that the unemployment rate has ticked higher due to a large increase in the labor force. This confirms the earlier narrative that the US economy is slowing down. This is undoubtedly very positive for the gold price.
Bottom Line
Basically, if we summarise things, the Fed is now fully pushed into a corner, and US economic data is throwing heavy punches at them. The chances are now upward of 80% that the Fed will cut interest rates in September, while one may not want to rule out the possibility of an interest rate cut in August or perhaps an interest rate of 50 basis points in September.