Market Watch: Gold Shows Resilience as Dollar and Yields Decline Ahead of US Inflation Assessment

Gold prices started the week off strong after U.S. job data disappointed market expectations, causing the U.S. dollar and bond yields to fall from recent high levels. How the economy continues responding this week to such inflationary tests will ultimately help market experts better gauge where the Federal Reserve will lean during the next meeting. Such new evidence of a cooling labor market only supports the idea that the Fed may finally have reached the end of its interest rate hiking cycle.

According to the survey of establishments by the Labor Department, nonfarm payrolls increased by 187,000 jobs last month. The department revised May and June’s data lower, decreasing June’s previous job growth figure from 209,000 to 185,000, making it the slowest month since Dember 2020. With this new information, July is now showing more positive acceleration based on previous months.

With the revised figures, we now know that the economy produced 49,000 fewer jobs than previously expected during May and June. Over the last three months, payroll growth averaged a pace of 218,000 jobs per month. This time last year, the average was significantly higher, at 434,000 jobs per month.

“There are many signs that we’re on the path to a ‘soft landing,’ but that path can also lead us to a sustained downturn if we miss the exit to a sustainable and strong labor market,” Nick Bunker, the head of economic research at Indeed Hiring Lab, explained. “We haven’t approached that fork in the road yet, but there is still a strong possibility that the labor market can rebalance without a recession.”

The marketplace was shocked after June’s positive figures, only to learn later that the economy was not as well-off as it seemed. A recession or hard landing following the end of the tightening cycle are still both very real possibilities considering the recent data updates. Such a poor scenario would bode well for gold, as it could increase safe-haven buying while decreasing the U.S. dollar.

“The combination of tight labor supply and waning labor demand has slowed job growth to a more typical rate consistent with moderate economic expansion as seen in the years before the pandemic,” Chris Low, the chief economist at FHN Financial, explained.

Based on expansions in the working-age group, the economy should supply about 100,000 new jobs per month to keep up at a healthy pace. Last month, the healthcare industry led economic growth by a landslide, increasing payrolls by 63,000 alone. The next largest industries stimulating the economy were finance and construction, both creating 19,000 positions.

A few industries have declined in job activity, including the hospitality sector, which typically averages around 67,000 new jobs per month during the first quarter of the year. Last month, the figure sat at just 17,000. High inflation levels, living expenses, and other costs can likely be to blame for people not wanting to spend their money on discretionary costs.

The leisure and hospitality industry is still well below its pre-COVID-19 pandemic job openings level by 352,000 jobs, while most other industries have fully recovered. Other industries that decreased last month included business services by 8,000 jobs, temporary help services by 22,000 jobs, and manufacturing by 2,000. Temporary help is still down by 205,000 per month since its March 2022 peak.

Another key figure from the latest job data release was the unemployment rate, which actually shed a bit of positivity. The unemployment rate in July increased to 3.5% compared to 3.6% in June.

The nation hasn’t seen a level this low in over 50 years. The Federal Reserve initially only hoped for levels to dip below 4.1% by the fourth quarter of the year, though we’re well below the goal already.

Marketplace estimates are now pointing toward no further hikes this year from the Fed. “With productivity growth accelerating, wage growth of 4% is no longer necessarily a deal-breaker for the Fed,” Paul Ashworth, the chief North America economist at Capital Economics, explained.

In overseas news, inflation in Europe has cooled as well after reaching its peak, according to the European Central Bank. Physical gold nearly reached a five-month peak in China last week with high retail demand as the top driver.

All this being said, gold is in a good position for the remainder of 2023 as we enter the back end of the Fed’s rate-hiking cycle and approach what could be a hard landing categorized by safe-haven buying. As always, investors should consult their advisors before making any portfolio decisions.

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