What the US non-farm payroll data tells us about the gold price

Prices of precious metal continue to remain under pressure

Dubai, United Arab Emirates - January 07 2013 - A passerby takes a look at the current market value of Gold on a digital screen at one end of the Gold Souk in Deira.  Many salesmen say that the screens have been helpful when customers try to bargain the price down - as there is now evidence as to what the current market value is in real-time. (Razan Alzayani / The National)
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An alarming US automatic data processing (ADP) number this week got investors thinking that last month’s US non-farm payroll figure was more than a surprise.

On Thursday, the June US ADP report showed a rise of 497,000 private sector jobs.

Going into Friday’s US non-farm payroll number, traders had great expectations and there were many nervous souls who were worried about backing riskier assets.

But official US non-farm payrolls showed employers added 209,000 new hires in June, below forecasts and down from 339,000 in May.

The number has changed the game and it is telling a slightly different story about the US economy, its stock market and, more importantly, the future path of the gold price.

The shocking number

The ADP number had appeared to show that the private labour market was on fire.

At 497,000, it was more than double the expected 226,000, while the previous number – 267,000 – was underwhelming in comparison to expectations at that time.

Generally speaking, the ADP number sets the tone for US non-farm payroll data.

A strong ADP reading usually suggests that non-farm payroll data will be strong, while a weak ADP data set indicates that the non-farm payroll performance is going to be weak as well.

However, in reality, the correlation between the two data sets has lost a lot of lustre.

There are many investors who believe that the ADP number gives no indication about the US non-farm payroll data as there have been too many instances when these numbers have been completely out of synch – and this week’s non-farm payroll figure is the latest example of this.

US non-farm payrolls

Going into the non-farm payroll data, traders were hoping that the actual reading would be well above the expectation of 224,000. Some of the whispered numbers on the Bloomberg terminal were indicating that the number could be as hot as 700,000.

The actual number of 209,000 against the previous reading of 306,000, brought a lot of mixed messages and it certainly has created confusion among investors and traders.

It was simply not good news for the US Federal Reserve, which has appeared to have no qualms about the job market health.

Further bad news came in the form of the unemployment rate, which ticked higher to 5.4 per cent, when the expectations were for 5.3 per cent, and while the previous reading was at 5.2 per cent.

But not all was doom and gloom as the average hourly earnings month-on-month brought some good news for the Fed. It ticked higher to 0.4 per cent, while the forecast was for 0.3 per cent.

Gold price action

Despite a weak overall number, the gold price moved lower on the back of the US inflation data in the first hour of trading. This simply means that the data wasn’t as weak as many headlines suggested and nothing significant has changed for the Fed to change its current monetary policy about its potential interest rate hikes for the remainder of this year.

But at the time, it also means that the Fed cannot take all the comfort that it took in the ADP data and become overconfident about the US job market. The Fed also needs to be careful in approaching its monetary policy decision as the unemployment rate has ticked higher.

What does all this mean?

There are two important things to take into account when it comes to the US labour market:

  • Payrolls for every month this year have been revised lower, which confirms weakness in the market, and this is good for the gold price as the dollar index may ease off
  • This month’s on-farm payroll number was the first miss against expectations. It means that the long lag in the US labour market has finally started to feed in, which again could be bad news.

Gold prices continue to remain under pressure, despite a weak US jobs number, as the two sets of job numbers haven’t provided a clear picture of the job market, which the Fed pays the most attention to.

US Federal Reserve raises interest rates for tenth consecutive time

US Federal Reserve raises interest rates for tenth consecutive time

Traders are going to need more information, and the most important information that they can get will be coming on July 12, when the consumer price index month-on-month and year-on-year data will be released.

The current CPI year-on-year number stands at 4 per cent, which is literally double the Fed’s target. It is likely that this number will drop in the 3-handle this week, easing pressure on the Fed, but they are far from out of the woods.

So, in terms of the gold price, the support at $1,900 an ounce remains strong as the US ADP failed to keep the price below that level. The fact that the inflation reading may show us a reading that could be in the 3-handle means we could see the price potentially moving towards $1,950, which currently acts as a resistance.

However, the main resistance continues to remain at the $2,000 to $2,049 price point, according to AvaTrade data. In order for the price to reach this level, we would see a significant improvement in the inflation reading, which would deter the Fed from hiking rates further.

On the flip side, if the inflation reading shows its sticky nature, that means a significant downward move, and that could make the traders push the price of gold towards the support of $1,800 to $1,841.

Naeem Aslam is chief investment officer at Zaye Capital Markets

Updated: July 08, 2023, 3:00 AM