Nonfarm employment explodes! The Fed faces a rate cut decision; will gold or the dollar prevail?
The U.S. Department of Labor's nonfarm payrolls report released on Friday, April 5, showed that nonfarm employment increased by 303,000 in March, far exceeding the expected increase of 200,000 and marking the largest increase since May 2023. The unemployment rate in March was 3.3%, compared to an expectation of 3.9%, and the annual wage rate was 4.1%, as expected. Following the release of the nonfarm payroll data, the swap market pushed back the first date for a Fed rate cut from July to September. After the release of the U.S. March nonfarm payroll data, spot gold briefly plunged before rebounding, currently trading at $2287.44 per ounce, with the intraday decline narrowing to 0.13%. The U.S. Dollar Index (DXY) continued to rise by nearly 40 points, reaching 104.56. After the release of the U.S. employment data, the inversion of the U.S. 2-year/10-year Treasury yield curve deepened, reaching -31.7 basis points. Driven by the significant increase in nonfarm payrolls, U.S. Treasury yields and the dollar surged. The U.S. labor market remains strong, which will delay expectations of a rate cut. Following the release of the nonfarm payroll data, the swap market pushed back the first date for a Fed rate cut from July to September
Time:
2024-04-06 09:05
According to the Huitong Finance APP, the US Department of Labor's nonfarm payrolls report released on Friday (April 5) showed that nonfarm employment increased by 303,000 in March, far exceeding the expected increase of 200,000, the largest increase since May 2023. The unemployment rate in March was 3.3%, compared to an expectation of 3.9%, and the annual wage rate was 4.1%, as expected. After the release of the nonfarm payroll data, the swap market pushed back the first date of the Fed's rate cut from July to September. After the release of the US March nonfarm payroll data, spot gold fell slightly before rebounding, currently at $2287.44 per ounce, with the intraday decline narrowing to 0.13%. The US Dollar Index (DXY) continued to rise by nearly 40 points, reaching 104.56. Non-US currencies fell, with the euro against the dollar falling sharply, hitting a two-day low of 1.0817, turning negative for the day, with the intraday decline widening to 0.18%; the British pound against the dollar fell 50 points in the short term, currently at 1.2591; the US dollar against the Japanese yen rose nearly 50 points in the short term, currently at 151.65.
After the release of the US employment data, the inversion of the US 2-year/10-year Treasury yield curve deepened, reaching -31.7 basis points.
US Treasury yields rose after another strong jobs report. The 2-year Treasury yield jumped 5 basis points to 4.70%. The 10-year Treasury yield rose 7 basis points to 4.38%. Expectations for a rate cut in June have fallen; the current expectation is a 14-basis-point cut, down from 16 basis points previously. OIS swaps show that expectations for rate cuts this year have fallen to 68 basis points.
US Treasury yields and the dollar surged on the back of a large increase in nonfarm payrolls. The US labor market remains strong, which will delay expectations of rate cuts.
The nonfarm report suggests the Fed can remain patient on inflation. The labor market hasn't weakened suddenly, leaving the Fed in a dilemma of addressing labor market issues while also focusing on high inflation.
US investors view the March nonfarm payroll report: Employment numbers even exceeded Wall Street's most optimistic expectations. This may signal stronger economic growth or better-than-expected labor market performance.
After the release of the nonfarm payroll data, the swap market pushed back the first date of the Fed's rate cut from July to September.
Fed Chair Jerome Powell and other officials have previously emphasized the need for more thorough debate and data support before deciding on a rate cut. Powell himself previously stated that the Fed still has time to consider the first rate cut, given the strong economic performance and recent inflation reports.
Investors are currently confused about the extent of the Fed's rate cuts this year. The continued strength of the economy and the broad-based rise in commodity prices such as oil, copper, coffee, and cocoa have made the inflation situation more complex.
Geopolitical factors are seen as an important basis for the medium-term bullish outlook for gold, influenced by multiple factors such as the situation in Gaza, the Russia-Ukraine conflict, the US election, and the potential for recessions in major economies. In addition, the Fed's rate cut expectations and the trend of investors shifting from fixed-income assets such as bonds to other investment areas have also increased the attractiveness of gold.
Analysts' view on the future trend of gold
Luca Santos, an analyst at ACY Securities, believes that gold prices will continue to rise after a normal correction. He points out that the decline in the US dollar, the Fed's rate cut expectations, economic uncertainty, and the escalation of tensions in the Middle East are the main factors driving the gold market.
The US dollar is heading towards its first weekly decline in a month on Friday, but has rebounded from a two-week low. This is mainly due to the upcoming release of key employment reports in the US, while tensions in the Middle East are also unsettling investors.
The dollar experienced sharp fluctuations this week, falling from a five-month high to a two-week low. This followed an unexpected slowdown in US service sector growth, which supported market expectations for rate cuts. However, Minneapolis Fed President Kashkari said on Thursday that rate cuts may not be needed this year if inflation remains subdued. This statement caused the dollar to rebound, but Kashkari does not have a vote this year.
Fiona Cincotta, senior market strategist at City Index, said that the market is generally concerned that the Fed may not be able to cut interest rates three times as expected. She pointed out that any remarks by Fed officials supporting a more hawkish stance, regardless of whether they have voting rights, could trigger market nervousness, and coupled with geopolitical tensions, market sentiment has become more volatile. At the same time, commodity prices are also an important factor affecting market sentiment.
Hugo Pascal, a precious metals trader at InProved, believes that gold prices are currently in overbought territory and expects a correction in the coming days, with a first target of $2250. He said that the strong performance of nonfarm payroll data will put pressure on precious metals, suggesting that inflationary pressures are rising.
Juerg Kiener, chief investment officer at Swiss Asia Capital, is optimistic about the forward curve analysis of gold. He said that if you look at the one-year forward curve, the gold price is around $2600. He believes that the gold price will soon break through $2300 because market demand is suppressed. In addition, he also pointed out that the plummeting inventory in the gold market is putting many derivative structures at risk, which may also put many institutions trading gold in the market at risk. Geopolitical factors, the shift to a "multipolar world," and changes in the international trade structure are also driving gold prices higher. At the same time, the large outflow of precious metals from Western countries and the "real shift" in demand for precious metals from the BRICS countries are also driving gold prices higher.
Short-covering refers to when the price of an asset rises sharply, investors holding short positions (i.e., betting on a price drop) are forced to buy the asset to close their positions, further pushing up the price.
Gold is generally considered a safe-haven asset and a potential hedge against inflation. In the current global economic environment, investors remain cautious about developments in the Middle East. Driven by strong central bank buying and fund demand, gold is poised to rise for a third consecutive week. So far, it has risen by 2.5%.
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