Gold Holds Firm as the Marketplace Responds to the U.S. Employment Data Release

Gold recently achieved near three-week highs after key U.S. employment data revealed an increase in non-farm payrolls above market expectations. Between August’s spike in unemployment, moderate wage improvements, and easing job market conditions, most believe September’s interest rate decision has been solidified. The expected rate pause in September gave gold a stellar push on Friday before the weekend holiday, allowing it to nearly surpass its monthly high achieved on August 2.

Gold prices are currently trying to “stabilise and recover a little bit as marketers try again and again to get some hope that monetary policy is done,” Peter Fertig, Quantitative Commodity Research analyst, explained. “A tight labour market will keep the Fed on hold for quite some time.”

On September 1, August’s employment data came through with a few shocking figures. To start, the key non-farm payrolls figure increased by 187,000 jobs. The marketplace forecasted 170,000. For reference, July’s non-farm payrolls increased by 157,000, while June’s increased by 105,000 (based on revised figures).

“This is probably the final nail in the coffin for the chances of another rate hike by the Fed in September,” Christopher Rupkey, a chief economist at FWDBONDS, stated when discussing the recent job data.

The unemployment rate in August spiked compared to the month prior. August’s unemployment rate was 3.8% compared to July’s rate of 3.5%. While August’s figures may show a few odd spikes, the downward numbers and revised data from the previous months position August as an improvement.

“Employment continued to trend up in health care, leisure and hospitality, social assistance, and construction. Employment in transportation and warehousing declined,” the release stated.

With this data, most feel confident that the Federal Reserve will enact a rate pause during the upcoming meeting scheduled for September 19 and 20. According to CME’s FedWatch Tool, the current likelihood of rates staying the same after September’s meeting is 93%. The question now is, when will the Fed begin cutting rates?

“With pockets of data suggesting that the world’s largest economy could be slowing, investors are now looking ahead to when the Fed will cut interest rates, and this is boosting gold,” Rupert Rowling, a market analyst at Kinesis Money, explained.

Data from CME’s FedWatch Tool shows the first bets of a rate cut coming in January 2024 at under 9.5%. By June of next year, the odds of a rate cut increase to 25%.

In overseas news, China recently received positive data regarding its manufacturing purchasing managers index (PMI). The activity came in much stronger than expected for last month at 51.0 compared to July’s 49.2. Any reading above 50.0 displays sector growth.

The People’s Bank of China recently began reducing foreign exchange reserve criteria on local banks in an effort to reduce the Chinese yuan depreciation rate. The currency has already lost over 5% against the U.S. dollar. The reserve requirements are now dropping to 4% rather than 6% to help Chinese financial institutions use foreign funds.

At the same time, Europe’s manufacturing activity PMI came in below expectations at 43.5 compared to the forecasted 43.7. For reference, July’s figure was 42.7.

The current U.S. manufacturing PMI is 47.60, compared to July’s figure of 46.40. This time last year, however, the PMI was 52.80. The one-month change is 2.59%, while the one-year change is -9.85%.

“A PMI above 50 would designate an overall expansion of the manufacturing economy, whereas a PMI below 50 signifies a shrinking of the manufacturing economy,” the report states.

As more data continues coming forward, the odds of a rate pause in September only go up. A pause should provide gold with short-term price support.

How the economy responds after September’s likely pause will be gold’s most significant determining factor. Positive, though moderate, economic growth would show the Fed that the current rates are working. Extreme growth or sudden lags, however, may constitute another rate hike.

Fed committee members seem to believe that the current policy can bring us to the target 2% inflation level over time. How long we will need to maintain the current rate is still highly up for debate. A rate cut by early 2024 would mean excellent news for gold, though many think we may not see rate cuts that soon.

For now, traders can continue assessing the incoming data to predict how the Federal Reserve may respond during September’s FOMC meeting. As always, investors should consult their financial advisors before making any portfolio decisions.

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