NFP's Potential Impact on Gold

Given the surprise job numbers last month and the recent shift towards expecting a more significant hike by the Fed, there is much expectation around the imminent NFP release.

Looking For a Repeat of Jan's Print?

Last month's NFP exceeded the average expectations, and it's good to understand why. A portion of the jump can be attributed to an agreement with teachers in California which saw 74,000 state employees returning to payrolls. But the biggest difference was due to the seasonal adjustment. Typically, many jobs are lost in January because of the weather and the end of the holiday season. But that didn't happen this year because of unseasonably warm weather, particularly in the northeast. Naturally, construction and drilling came to a halt with the ground frozen in January and February, and that didn't happen either, meaning there were comparatively more jobs.

The weather stayed warm through February as well, so there is a chance that the numbers could outperform again. On the other hand, it's relatively common for numbers way out of averages to be adjusted, and we could see the overshoot from January pared back a bit.

What to Watch Out For in the Numbers

The consensus is that there were 210K jobs created in February, compared to the 517K reported in January. Meanwhile, the unemployment rate is expected to remain at the historic low of 3.4%. Federal Reserve Chair Jerome Powell's comments before Congress over the last couple of days implied heavily that if economic data came in above expectations, it could push the FOMC to raise rates by 50bps at the next meeting. Most traders expect a "double hike", with much attention on the jobs numbers. Several FOMC members have expressed concern about the tightness in the jobs market already.

Another beat of expectations could convince the market that the Fed will go back to aggressively pursuing rate hikes and raise worries about a recession. Gold does well when the economy does not, but higher interest rates tend to push the price of gold down as investors look for higher returns in treasuries. On the other hand, a substantial undershoot of the jobs numbers could help allay fears of a 50bps hike at the next FOMC meeting, weaken the dollar and give gold a bit of a boost.

Gold on Hold Mode at Low

Gold prices have reversed into a downward trend since the peak of $1975/oz, currently moving sideways due to a double-bottom formation at $1813/oz. With prices restrained from further declines for now, the opposite side of the range is settled near $1864/oz should $1840/oz give in. Above there lies the $1900/oz handle. Conversely, breaking the bottom might lead to an extended leg towards $1757/oz. In the interim, $1795 may offer support.

Key Takeaways

February's NFP has attracted much attention due to the record-breaking numbers in January, with a consensus of 210K jobs created last month. Also, mainly due to Fed Jerome Powell's comments before Congress as they have implied that if economic data comes in above expectations, the FOMC could raise rates by 50bps at the next meeting. The market is waiting to see how the NFP report and expectations of a rate hike will impact gold prices.