NFP Preview: Can Strong Jobs Data Revive Fed Rate Hike Expectations & Pull Gold Lower?

The U.S. nonfarm payroll report will be released on Friday at 08:30 ET and will provide markets with a fresh assessment of labour-market conditions.

Expectations are for 100,000 jobs to have been created in September, following 162,000 added in August Meanwhile, the unemployment rate is expected to remain unchanged at 4.2%, while average hourly earnings are forecast to increase 0.3% month-on-month, or 3.2% annually.

The report follows the Federal Reserve’s decision to hike interest rates by 25 basis points to 3.75%-4% at its September 16 meeting. The Fed described economic activity as expanding at a solid pace and inflation as elevated, while also noting that job gains had remained solid.

Mixed Signals from Lead Indicators

Lead indicators are so far showing a mixed picture.

On the one hand, U.S. job vacancies fell more than expected to 7.08 million. However, ADP private payrolls rose more than expected, increasing by 90,000 versus the 70,000 forecast.

U.S. jobless claims and the employment component of the ISM PMI will be released today. Stronger-than-expected figures could increase expectations of an NFP beat.

Why Strong NFP Data Could Be Bad for Markets

The data comes as the Federal Reserve balances labour-market conditions against inflation, which remains elevated but has recently shown signs of cooling.

Core PCE data on Wednesday showed inflation remained unchanged at 3% year-on-year in August, below expectations of 3.3%. On a monthly basis, core PCE rose 0.2%, up from 0.1% but below the 0.3% forecast.

This gives the Fed some leeway, with October rate hike expectations falling to 40%, from 70% at the start of the week.

However, Treasury yields remain elevated, with the 10-year yield rising to 5.30%, its highest level since May 2002, after Q2 GDP was revised higher to 2.2%.

The market is therefore becoming less concerned about a deteriorating labour market and more concerned that a strong labour market could add to inflationary pressures in an already resilient economy.

A strong NFP headline number, or an unexpected fall in unemployment, could see October rate hike expectations rebound, lifting Treasury yields and the U.S. dollar while weighing on gold and equities.

Conversely, weaker-than-expected payrolls, combined with this week’s cooler-than-forecast core PCE data, could push Treasury yields and the dollar lower while supporting gold and U.S. equities.

The key question is therefore whether Friday’s data confirms a resilient labour market that keeps inflationary pressures elevated, or provides the Fed with enough evidence to push back another rate hike until December.

How could the NFP report impact Gold?

XAU/USD trading below its 50 and 200 EMA in a bearish picture, which, combined with the RSI below 50, keeps bears hopeful of further downside. The 50 EMA is crossing below the 200 EMA in a death cross sell signal. The price has found support at 4110 and recovered higher, but lacks strong follow-through.

A stronger-than-expected NFP report could see sellers look to take out support at 4100, the March low. A break below here sees attention turn to 3940.

On the other hand, a weaker-than-expected headline NFP number or a rise in unemployment could see Gold extend its recovery higher. Buyers will need to rise above 4330, the 50 and 200 EMA and the 23.6% fib retracement of the 5598 high, 3940 low. Above here the price is on a more stable footing with $4500 coming into focus.