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In the Asian market early trading session, spot gold remained largely stable, currently trading around $2357 per ounce. Investors will be focusing on the US Nonfarm Payroll report today, which is expected to trigger significant movements in the gold market. FXStreet analyst Eren Sengezer recently wrote an article analyzing gold's reaction to the Nonfarm report.

The "smaller Nonfarm" ADP report and initial jobless claims released earlier this week were weaker than expected, casting a shadow over Friday's Nonfarm data.

Sengezer points out that the US is expected to add 190,000 nonfarm jobs in June. Compared to a positive Nonfarm employment report, gold may react more strongly to disappointing employment data.

On Wednesday, the ADP employment report, often referred to as the "smaller Nonfarm," showed that private sector employment increased by 150,000 in June, marking a third consecutive monthly decline and a new low since January this year, lower than the 163,000 expected by economists.

In addition, data released by the US Department of Labor on Wednesday showed that the seasonally adjusted initial jobless claims in the week ending June 29 were 238,000, higher than the market expectation of 234,000. Seasonally adjusted continuing jobless claims were 1.858 million in the week ending June 22, higher than market expectations and the highest since November 2021.

At 8:30 PM Beijing time on Friday, investors will receive the US June Nonfarm Payroll report. It will provide the market with further clues to assess the US labor market conditions and the outlook for the Federal Reserve's monetary policy.

Following the significantly better-than-expected addition of 272,000 jobs in May, the increase in US nonfarm employment in June is expected to slow considerably.

Initial jobless claims have risen in recent weeks, although they remain historically low. However, since initial claims rose between the survey reference months for the May and June Nonfarm reports, the increase in June Nonfarm employment may slow.

Furthermore, continuing jobless claims rose to their highest level since the end of 2021 last week, a warning sign that unemployed individuals are taking longer to find work. However, growth in healthcare, leisure and hospitality, and local and state government jobs should support a relatively solid increase in Nonfarm employment.

Authoritative media surveys show that the seasonally adjusted US nonfarm payroll employment is expected to increase by 190,000 in June, compared to an increase of 272,000 in May. The US unemployment rate is expected to remain unchanged at 4.0%, which is still the highest level since February 2022.

In addition to overall nonfarm employment changes and the unemployment rate, investors need to pay close attention to average hourly earnings data, which can provide important signals on inflation. The year-on-year increase in average hourly earnings in the US is expected to fall from 4.1% in the previous month to 3.9% in June, a post-pandemic low. Authoritative media surveys also show that the monthly increase in average hourly earnings in the US is expected to rise by 0.3% in June, lower than the 0.4% increase in May.

This is consistent with the trend of cooling inflation in the US. Recently, the core PCE price index, the Fed's preferred inflation measure, has gradually declined, supporting expectations of interest rate cuts in the coming months. On July 2, Federal Reserve Chairman Powell said at the European Central Bank meeting in Sintra that prices now show that the disinflationary trend is recovering, and recent inflation data show that inflation is on a downward path, and he hopes to see more data like this recently.

Investors will also be watching the labor force participation rate. Media surveys show that the US labor force participation rate is expected to remain unchanged at 62.5% in June.

The following is the main content of the article written by Eren Sengezer:

Historically, how much impact has the US employment report had on gold prices? In this article, we present the results of a study in which we analyzed gold's reaction to the previous 35 Nonfarm Payrolls data releases. (Note: We omitted the March 2023 Nonfarm Payroll data, which was released on the first Friday of April, due to lower volatility because of Easter.)

We present our findings on the eve of the US Bureau of Labor Statistics' release of the June employment report on Friday, July 5. Nonfarm payrolls are expected to increase by 190,000 in June, following an increase of 272,000 in May (stronger than previously expected).

Analysis Methodology

We charted gold's reaction within 15 minutes, 1 hour, and 4 hours after the Nonfarm data release. Then, we compared gold's reaction to the deviation between the actual Nonfarm result and the expected result.

We used the FXStreet Economic Calendar to calculate the deviation data, as it assigns a deviation point to each macroeconomic data release to show how much the actual data differs from the market consensus. For example, the August 2021 Nonfarm Payroll data was significantly lower than the market expectation of 750,000, with a deviation of -1.49. On the other hand, the September 2023 Nonfarm Payroll data was 246,000, higher than the market expectation of 170,000, a positive surprise, with a deviation of 2.66. Better-than-expected US Nonfarm Payroll data is considered positive for the dollar, and vice versa.

Finally, we calculated the correlation coefficient (r) to find out which time period showed the strongest correlation between gold and Nonfarm surprises. When the r-value approaches -1, it indicates a significant negative correlation, and when the r-value approaches 1, it indicates a significant positive correlation. Since gold is priced in US dollars, a positive Nonfarm report should cause gold prices to fall, pointing to a negative correlation.

Analysis Results

Of the previous 35 Nonfarm data releases, 9 were below expectations and 26 were above expectations. On average, the deviation was -0.74 for disappointing data and 1.42 for strong data. Fifteen minutes after the data release, if the Nonfarm employment data was below market consensus, gold prices rose by an average of $6.45. On the other hand, if the data was better than expected, gold prices fell by an average of $5.38. This finding suggests that investors' immediate reaction to weaker-than-expected Nonfarm data may be stronger.

The correlation coefficients we calculated for the different timeframes mentioned above did not approach -1, which would be considered significant. The strongest negative correlation occurred 15 minutes after the release, with an r-value of -0.52, rising to -0.51 and -0.48 after 1 hour and 4 hours, respectively.

Several factors may be at play, weakening the negative correlation between gold and Nonfarm employment data surprises. A few hours after the Friday Nonfarm employment data release, investors may seek to take profits near the London fixing, causing gold prices to reverse course after the initial reaction.

More importantly, the underlying details of the Nonfarm employment report, such as wage inflation as measured by average hourly earnings and the labor force participation rate, may influence market reaction. The Federal Reserve's adherence to its data-dependent approach, the overall nonfarm employment change data, along with these other data points, may drive market pricing of the Fed's next policy move.

Furthermore, revisions to previous data may distort the impact of recently released figures. For example, nonfarm payroll growth in February 2024 was 275,000, exceeding market expectations of 200,000. However, the January increase of 335,000 was revised down to 229,000, preventing the dollar from benefiting from the optimistic February data.