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Gold Market To Eye U.S. Nonfarm Payrolls For Next Clue On Fed Monetary Policy

(Kitco News) - A gold market that has oscillated on Federal Reserve expectations will zero in on the monthly U.S. employment report Friday for the next clue on whether U.S. interest rates will rise this year.

The Labor Department is scheduled to release the always-important monthly jobs report at 8:30 a.m. EST. Consensus expectations compiled by various news organizations call for October nonfarm payrolls to rise by between 177,000 and 190,000, while the unemployment rate is expected to hold at 5.1%.

“Given that the Fed has tied its monetary policy to employment and inflation, a stronger-than-expected nonfarm payrolls number may increase rate-hike expectations for December, which would weigh on gold,” said Jim Steel, precious-metals analyst with HSBC. “Conversely, a lower-than-expected reading may delay rate-hike expectations, which would be positive for bullion, in our view.”

Higher rates hurt gold by boosting the U.S. dollar (gold and the currency tend to move inversely) and raising the so-called opportunity cost of holding gold (lost interest income from holding a non-yield-bearing asset instead). Conversely, lower rates underpin gold.

Gold has been in a narrow range so far Thursday, a common tendency for markets as traders take to the sidelines ahead of major news events. Shortly after noon EST, Comex December gold was up 30 cents to $1,106.50 an ounce.

Gold was on an uptrend for a while this fall on ideas the Fed might not hike rates this year, particularly after a month ago when the Labor Department reported that payrolls rose by only 142,000 in September. But then, the metal fell back when last week’s statement from the Federal Open Market Committee was construed by market participants to mean that a December rate hike was still a possibility after all, a sentiment echoed by Fed Chair Janet Yellen in a congressional appearance Wednesday.

Still, analysts with Brown Brothers Harriman pointed out that Yellen’s remarks were “nothing new,” even though they did fuel a rise in U.S. Treasury yields. As of early morning, the firm pointed out that the yield on two-year notes was higher than the peak ahead of the September meeting of the Federal Open Market Committee.

“Yes, the Dec. 16 FOMC meeting is live, but only if the data supports it,” BBH said about the potential for a rate hike this year. “Friday’s jobs report will be very important.”

As of late Wednesday, interest-rate markets were factoring in a roughly 60% probability of a Fed rate hike next month, according to a research note from Edward Meir, commodities consultant with INTL FCStone.

Economists at Nomura revised upward their nonfarm payrolls forecast to 165,000 after a report from payrolls processor ADP on Wednesday said that private-sector payrolls rose by 182,000 last month, as well as data this week from the Institute for Supply Management.  

“Although these were positive developments for U.S. labor markets, we remain skeptical that we will see job growth return back to its previous trend of plus-200K as other incoming data suggest that external factors continue to weigh on U.S. manufacturing and mining activity,” Nomura said. “Consistent with this view, we forecast that manufacturing payrolls declined by 10K in October. Moreover, as we approach ‘full employment,’ we expect payrolls to grow at a less-robust pace than observed over the past several quarters.”

By Allen Sykora of Kitco News;



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