After a surprisingly hawkish FOMC meeting last week, markets are primed to price in a rate hike for later this year, if the NFP data supports it. However, whether this will leave the dollar stronger or weaker may depend on the data’s components. US markets have been particularly fickle in the middle of earnings season as traders try to gauge monetary policy direction. The jobs data could be the catalyst that’s needed.
The main issue was the surprisingly strong March data, which saw job creation above almost all estimates. The unemployment rate also dropped, though this was attributed to a decline in labour force participation. It could be a sign that the job market is staging a recovery, or it could be just an outlier. April’s NFP could determine which case it is, and that will likely be a factor in deciding the interest rate outlook which is pivotal for how the dollar and gold will perform.
Doves Running Out of Justifications
Inflation in the US has been above the Fed’s target, even while cutting rates. The energy crisis will likely keep inflation elevated for the time beeing. So, what doves on the FOMC have argued is that the jobs market is weak, and therefore interest rates need to be lower. This is leaning into the Fed’s second mandate to maintain “full employment”, but also, weak job growth undermines consumer demand and prices, lowering inflation in the long run.
Last year and during the first two months of this year, jobs data was notably dismal, well below the ~180K job adds per month needed to replace workers retiring. February had significant job losses, after the US economy slammed on the brakes in the final quarter of last year. So, the question is whether February was a bottoming out, and now the economy and jobs market is rebounding. If that’s the case, then there isn’t much reason for the Fed to cut rates, and a growing argument to raise rates.
Indicators Point Up: Economy and Rates
Since last month, data has come in largely positive for the US economy. That includes the flash Q1 GDP accelerating to 2.0% annualized growth, and solid PMIs for April. Analysts looking at the PMI data saw businesses being precautious, raising rates, but not holding back on hiring. Corporate earnings were also largely positive, with few companies suggesting they were hesitant to hire.
However, those signs are superficial, and what matters is the actual data that will come out on Friday. Economists anticipate that April US (NFP) Non-Farm Payrolls will fall back to 73K from 186K a month earlier. That would imply that March was an outlier and could bring back concerns about the labor market and justifications for easing rates. The unemployment rate is anticipated to stay unchanged at 4.3%.
How the Market Might React to April NFP Figures
April Non-Farm Payrolls could be the most important data for the dollar and gold this week. Markets are pricing in around a 60% chance that the Fed will hold rates unchanged this year. This leaves little resistance to pushing the odds into pricing in a rate hike, which would likely support the dollar but weaken gold.
On the other hand, if NFP are below expectations, then traders could return to considering a rate cut by year’s end as the economy underperforms. This might be negative for the dollar, but positive for gold.
