Gold price surge on weaker-than-expected US jobs report

Spot gold extended its rally on Friday on a weaker-than-expected US nonfarm payroll report (June), which boosted rate cut possibility. The metal surged on Friday to close with a gain of 1.50% at $2392. It posted a weekly gain of around 2.80% .

Data round-up

Although the headline non-farm payroll number came in at 206k jobs, which topped the forecast of 190k jobs, the internals of the report were weak. The unemployment rate ticked up higher to 4.10% versus the forecast of 4%. It is to be noted that the unemployment rate hit a 50-year low in January and April of 2023 at 3.4%. The June data has triggered the Sahm rule, a real-time recession indicator.

According to this rule, a recession is underway if the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more, relative to its low during the previous 12 months. This is a positive development for the metal. The previous two-month net payroll number was revised lower by 111,000. Average hourly earnings were in line with the forecasts though.

Earlier in the week, we noted that continuing claims were up for the ninth straight week, the longest stretch since 2018, which showed the difficulties people are facing in finding new jobs. In a notable development, the US ISM services sector unexpectedly contracted at the fastest pace in four years as the gauge of services slumped to 48.80 Vs the forecast of 52.70, though S&P Global US Services Index (June) rose to 55.30, the highest since April 2022. The ISM services data showed a second contraction in the last three months as new orders at 47.30 fell into the contraction zone.

The US-based employers announced 48,786 job cuts in June, according to Challenger, Gray and Christmas Inc., the highest number for any June since 2009 barring the pandemic period. Factory orders (May) at -0.50% fell short of the forecast of 0.20%. FOMC minutes (June 12 meeting) showed that policymakers sought more evidence of inflation cooling before the Fed could start cutting rates.

China's Caixin PMI composite fell from 54.10 in May to 52.80 in June as PMI services stood at 51.20 Vs the forecast of 53.40, the lowest since October 2023.

The Fed Chair Powell, in his speech at the ECB Central banking forum in Sintra, Portugal, said that although the US economy is strong, the Fed will cut rates should the economy weaken.

US yields/Dollar Index

The ten-year US yields sank 2.15% to 4.28% on Friday in response to the soft nonfarm payroll report. The yields fell over 2% on the week. The two-year US yields tumbled nearly 3% on a weekly basis. The US Dollar Index fell 0.24% to close at 104.88; the Index fell around 1% on the week.

Next week data

Major US data on tap include US CPI, weekly jobless claims, PPI, preliminary University of Michigan Consumer Sentiments and both short-term and long-term inflation expectations. In addition, traders will look forward to the French Election results and Fed Chair Powell's testimony before the Senate Banking Committee and the House Financial Services Committee.

In addition, the focus will be on China's PPI and CPI (June), and the Euro-zone's factory orders (May) and retail sales (May), too.

Outlook

Unexpectedly weaker-than-expected US ISM services and softer-than-expected US nonfarm reports have boosted the chance of a rate cut in September. As the job market softens, traders, going by the Fed's take on rate cuts, have become more hopeful of a rate cut in September. September rate cut probability stands at 72% as compared to 57% a week ago. Gold is expected to trade with a positive bias next week unless the US CPI data turn out to be uncomfortably hotter than expected.

Support is at $2365/$2338. Resistance is at $2400/$2450.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)

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