Friday will see the release of the much anticipated monthly US Non-Farm Payrolls figures. Even more so than in previous months this data will be influential in setting the direction of the Gold market between its release on Friday and the next Federal Reserve policy meeting set for 17th and 18th March. It is the only major market moving data due out before the Fed meets so it will be the focus of not just traders but also the Fed itself.
Gold traders will be going over all the Non-Farm Payroll data, not just the headlines, with a fine tooth comb as they look for any indication as to when the Fed will start raising rates for the first time since June 2006. It is not a matter of will the Fed move rates higher, it is a matter of when and by how much; Is the Fed going to go early such as June and move higher over a drawn out period of time? Or are they going to move late such as the last quarter of 2015 or early 2016 and at a much quicker, steeper pace?
What we do know is the Fed has said it is patient. We read that as it will not move in the next few months. Traders will be looking for any signs in the Non-Farm Payroll data that will give a clue on when the Fed will increase rates. Strong data will give the Fed a reason to move early on rates, while any weakness could be seen as a sign the Fed will wait until later in the year to increase rates. Either way, this Friday is going to be key in the short term to how the Fed plays its rate cards at the upcoming meeting.
The Non-Farm Payroll data on Friday should confirm to us that the US economy is continuing to improve, however we do see significant headwinds ahead for the US. With equity markets in the US such as the S&P 500, Russell 2000 and Dow Jones all hitting record highs in recent days, along with the NASDAQ hitting levels not seen since the dot com bubble and bond yields sitting at record lows we do not think it will take much for a market correction to occur.
If the Non-Farm Payrolls are strong, also expect to see the US dollar trade higher and the price of gold to dip, this could provide a good buying opportunity for those looking for the price of gold to increase over the next 12 to 18 months. A strong US dollar is going to hinder growth in the US by making US exports more expensive, not to mention the impact it has on a number of countries, particularly emerging markets which feel the pain when the US dollar, which is already strong, gains even further. A lot of these countries have debt denominated in US dollars. An already strong US dollar, increasing in strength, coupled with much weaker oil prices is going to cause havoc for a number of these countries. While it may not mean much to the global economy if one or two of these emerging countries defaults or requires a bailout, if it happens to a number of countries within a short period of time, this could cause a much bigger issue for the world’s economy.
Any sign of weakness in the Non-Farm Payroll data is going to play into the hands of gold. If it appears that the data is not as strong as the market is anticipating, then expect investors to be adding gold to their portfolios. Uncertainty is good for the price of gold given it is the leading go-to investment when financial markets risk increases.
Keeping rates at low levels also reduces any opportunity cost associated with keeping funds in gold, which does not earn interest, instead of in a term deposit.
The consensus for Non-Farm Payroll jobs growth in February according to Econday is for an increase of 230k jobs, while unemployment is forecast to fall from 5.7% to 5.6%.
The growth in average hourly wage is expected to increase by 0.2% for the month, putting the yearly gain at only 2.1%. The Fed is really looking for strong wage growth to be added to the equation before they begin lifting rates, so investors should be paying close attention to the average hourly wage growth in the figures on Friday. Also of interest should be the labor force participation rate, this is really a great indication or bellwether on how people view the state of the economy.
The Non-Farm Payroll data is going to be hugely important to gold sentiment over the next couple of weeks as we head into the Fed’s policy meeting. With gold range trading at the moment, we suggest buying on dips below US$1,195oz.