Non-farm payroll data influences the Fed's interest rate cut trajectory! Is it another outbreak moment for gold bulls?

The employment situation in the United States in September is expected to be similar to that in August. Since earlier this year, the number of job openings has gradually slowed down, with wages rising slightly, and the labor market appears to be very similar to what many policymakers expected.

According to economists' consensus expectations, the non-farm payroll employment in September is expected to decrease slightly from the previous month's 142,000 to 140,000, with the unemployment rate remaining stable at 4.2%. In terms of wages, the year-on-year growth rate of average hourly earnings is expected to remain at 3.8%, with a month-on-month increase of 0.3%, slowing down from the previous month's 0.4%.

If the data meets expectations, this would be close to an optimal scenario, allowing the Federal Reserve to continue cutting interest rates without worrying about falling behind the curve and the risk of triggering an economic recession.

Katie Nixon, Chief Investment Officer at Northern Trust Wealth Management, said, "The job market is slowing down, and the tension is easing. The balance of power has shifted towards employees, which will certainly alleviate wage pressures, and wages have always been a key component of inflation. Our team has been expecting a soft landing for some time now, and it looks like a soft landing is happening."

Of course, non-farm payroll readings always have the potential for significant upside or downside surprises. In addition, monthly revision data can sometimes show significant changes. For example, the U.S. Department of Labor overcounted job openings by more than 800,000 in the 12 months ending in March 2024, adding uncertainty to labor market analysis.

However, Goldman Sachs analysts believe that seasonal distortions may have put pressure on the recent two employment data, so the employment growth in August may be revised upwards. Since 2010, employment growth in August has been revised upwards by an average of 67,000, with about two-thirds typically occurring in the first revision.

The U.S. Bureau of Labor Statistics will release the report at 8:30 p.m. Beijing time on Friday. Although there will be one more non-farm payroll count before the next month's election, the October report is expected to be distorted by the dockworkers' strike and the impact of Hurricane Helen, making the September non-farm report the last "clean" employment data before Election Day.

Mixed Clues

In the past few months, labor market indicators have been on a downward trend, but far from falling off a cliff. Surveys in the manufacturing and service sectors show a slowdown in hiring, and Federal Reserve Chairman Powell described the labor market earlier this week as robust but softening.

According to data from the U.S. Bureau of Labor Statistics, the last time the monthly hiring rate reached the levels seen this summer was in October 2013, when the unemployment rate was 7.2%, except for a brief downturn during the outbreak of the COVID-19 pandemic. The monthly hiring rates in June and August this year were both 3.3% The number of job vacancies has also decreased, and the ratio of job vacancies to unemployed persons has dropped from 2:1 several years ago to 1.1:1.

At the same time, there has been a slowdown in labor market mobility. Excluding the impact of the COVID-19 pandemic in 2020, since December 2014, the quit rate has never been lower than the current 1.9%, and the last time the layoff rate, which includes the pandemic period, was lower than the current 3.1% was in December 2012.

Before the release of this week's non-farm payroll report, other employment indicators are mixed.

For example, JOLTS job openings surged in August, rising from the revised 7.71 million in July to 8.04 million, higher than the expected 7.69 million. This is the highest level since May, indicating that the U.S. labor market remains tight. This data will support stronger-than-expected employment figures.

However, on the other hand, the employment component of the ISM Manufacturing Index sharply slowed down in September. The employment sub-index of the ISM Manufacturing Index has always been closely linked to the non-farm payroll report. Its reading dropped from 46 to 43.9 in September, in deep contraction territory, one of the lowest levels since 2020. Initial jobless claims have remained relatively stable, with a slight decrease in recent weeks, supporting the stability of the unemployment rate.

Will the Fed's Stance Waver?

The September non-farm payroll data will help shape expectations for the Fed's loose policy by the end of this year. Powell hinted this week that if economic data meets expectations, there will be 25 basis point rate cuts in November and December respectively. Compared to market pricing, this is a hawkish view.

This guidance and the better-than-expected ADP data have shifted market pricing back towards a 25 basis point rate cut in November, with the current probability exceeding 60%.

Goldman Sachs' Chief Trader John Flood said, "Expectations for non-farm payroll data have risen to 175,000 after the better-than-expected ADP data."

Nevertheless, if the data shows a significant weakening, market expectations for another 50 basis point rate cut by the Fed may reignite. Atlanta Fed President Bostic previously stated that data below 100,000 would be cause for concern.

David Kelly, Chief Global Strategist at Morgan Stanley Asset Management, believes, "A strong number won't really change their stance. A weak number might tempt them to cut rates by another 50 basis points." However, Kelly also added that the Fed is more likely to view the employment situation as "murky" as opposed to being led by a single data point.

Morgan Stanley economist Nora Szentivanyi expects that the U.S. non-farm payroll employment in September will increase by 125,000, showing that labor demand is still slowing down, implying that the Fed may still cut rates by 50 basis points in a single move. "If the data is around 100,000, it will increase the likelihood of a significant rate cut" Another analyst at Goldman Sachs, Rich Privorotsky, believes that the impact of non-farm payroll data should be straightforward, as good news is good news, and bad news is bad news. "A reading below 100,000 will raise concerns about the Fed falling behind the curve again, with the best-case scenario being slightly better than expected but not very strong, i.e., below 200,000."

Is Gold Set to Return to Historic Highs?

Ahead of the release of the US non-farm payroll data, some traders have taken profits and adjusted positions following the recent rebound in the US dollar. After hitting a six-week high on Thursday, the US dollar index retreated in early trading on Friday.

Bets on the Fed's aggressive easing policy have reduced support for interest-free gold prices, but geopolitical tensions between Iran and Israel have limited the downside potential for gold.

The next direction for gold will depend on the upcoming non-farm payroll data. Unexpected increases in job growth and wage inflation data could support bets on a 25-basis-point rate cut by the Fed in November, adding extra impetus to the US dollar's recovery and putting pressure on gold prices. Conversely, if the results fall well short of expectations, expectations of a significant rate cut by the Fed at the next meeting may resurface, dealing a blow to the US dollar. In this scenario, gold prices could rise back to the historical high of $2,686.

Fxstreet analysts point out that the short-term technical outlook for gold remains largely unchanged, as long as the 14-day Relative Strength Index (RSI) remains in the bullish zone, buyers will have momentum. The leading indicator is currently trading near 68.

Gold prices need to stay above the static resistance level near $2,670 to gain new upside potential. The next resistance level is at the historical high of $2,686. If there is further upside, bulls will target the psychological level of $2,700, followed by the rising trendline resistance level, currently at $2,752.

On the other hand, it is crucial to hold above the September 24 low of $2,623 before dropping to the $2,600 threshold (which coincides with the 21-day simple moving average)