Gold prices are back above $5,000, but will likely need a catalyst to push back towards the highs seen at the end of last month. But this is a somewhat unique double-feature week, with the release of both jobs and inflation numbers for the US. Naturally, the greenback is more likely to be directly impacted, but the evolution of the monetary policy outlook will be pivotal for gold. Since the inflation data comes out later in the week, let’s focus on the upcoming NFP data as it is a major component in the Fed’s thinking.
Since the last meeting, when the FOMC decided to pause its rate-cutting cycle and Fed Chair Jerome Powell provided a cautiously hawkish message, the odds of a rate cut in March have remained fairly steady. Markets are anticipating just a 1-in-5 chance of easing at the next FOMC meeting. We have to look all the way to June to find a majority in favor of easing. Those odds haven’t changed despite US President Donald Trump appointing a notoriously hawkish replacement for Fed Chair Jerome Powell, whose term expires in May.
What the Market is Looking For
Prior rate cuts were justified by a weaker jobs market, as dovish Fed officials argued that slow wage growth would weigh on inflation. If the FOMC didn’t act preemptively, inflation would fall below target as the economy slowed too fast. In other words, they argue that the current policy is still too restrictive. So, for the market to price in more rate cuts, there would have to be continued signs of weakness in the jobs market.
Last week, the private ADP measure of job creation came in at half of expectations, suggesting labor force slack continued into the new year. The private measure isn’t seen as predictive of the final NFP number, but it does tend to indicate the data’s direction. And the Fed is likely looking more at the medium-term trend in the job market over a specific number of jobs created. After all, the Fed doesn’t have a mandate to support job creation, but rather to ensure full employment. And that’s best measured by the unemployment rate.
What The Market Is Expecting
Analysts’ consensus is that US Jan NFP will decline slightly to 40K from the 50K reported a month earlier. This is far from the 180K generally understood to be the replacement level, indicating that the total number of people employed continues to fall. However, it would still be in line with recent trends, suggesting that it wouldn’t be a serious deterioration.
Meanwhile, the unemployment rate is projected to tick back to 4.5% from 4.4% in December. While still at the structural level, a lift-off in the jobless rate could be used to justify further rate cuts. This indicator is generally seen as a better measure of labor market slack, which is why it’s more closely tied to the Fed’s policy outlook. A surprise to the upside could be the catalyst needed to start raising hopes of a March rate cut. On the other hand, if the unemployment rate actually falls, it could mean the hawks at the Fed will remain in charge for a while.
The Potential Market Reaction
Analysts are still waiting for more clues to try to figure out how a Warsh-headed FOMC will behave in May and going forward. It might be that the current FOMC will simply keep things steady until then, and that it will take a major market move to dislodge expectations.
The dollar and gold are likely to move in opposite directions, depending on the data. Signs of weakness in the job market are likely to be bad for the greenback but support gold. The yellow metal could suffer if the jobs market shows signs of a solid recovery, such as a triple-digit NFP report.
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