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What’s next for NFP post ADP’s solid beat?

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In a positive turn of events, ADP’s payroll numbers for March have exceeded expectations, signaling robust growth in the job market. This notable surge, the largest since July of last year, suggests a potential shift in the FOMC approach to interest rate cuts for the year.

March witnessed a substantial increase of 184,000 ADP jobs, outperforming the anticipated 145,000 private jobs estimated by the Bureau of Labor Statistics (BLS). This uptick, which contributed to a total BLS payroll gain of 170,000 jobs, follows a period of modest gains since August and hints at optimistic prospects for the jobs report tomorrow (NFP).

The surge in March’s employment figures was primarily driven by a significant rise in private service jobs, particularly in the leisure and hospitality sector, which saw a notable increase of 63,000 jobs. Additionally, there was a solid 42,000 increase in the goods sector payroll, with gains in construction, manufacturing, and mining.

Looking ahead, forecasts predict a nonfarm payroll estimate of 170,000 jobs for March, following gains of 275,000 in February and 229,000 in January. Other indicators such as the expected stability in the workweek, a slight increase in hourly earnings by 0.4%, and an unchanged jobless rate at 3.9%, further bolster confidence in the economy’s resilience.

Despite these positive signs, there remain risks to payroll numbers, primarily attributed to a potential moderation in GDP growth. Nevertheless, forecasts anticipate continued growth in goods-based employment, construction, and factory jobs, supported by an increase in private service jobs. It’s worth noting that the Employment Cost Index (ECI), designed to provide a more accurate reflection of wage trends, revealed a steady increase in wages and benefit costs. While there was a slight dip in the y/y ECI gauge in Q4, it still remains relatively strong compared to historical data.

In summary, the latest ADP payroll numbers paint a promising picture of economic recovery, with indications of sustained job growth across various sectors. These positive trends bode well for the growth signals seen of the US economy. However, these along with the lack of anything hawkish from Powell, added to worries the FOMC will not be cutting as many times as anticipated this year. The Fed funds futures, implied rates are now about 50-50 for a June cut, with July showing about a 95% probability for the first cut. 

How could Gold react to the NFP release?

An interesting study from IMF Working Paper on Gold’s reaction for the past 35 NFP releases showed that the historical impact of the US jobs report on Gold’s value is greater if the NFP disappoints.

In the long term, there isn’t a definitive correlation between Gold prices and the jobs report, as indicated by the IMF Working Paper. However, short-term movements in gold prices tend to demonstrate a more pronounced response to a disappointing jobs report compared to a positive one. Meanwhile due to the negative correlation between the price of Gold and NFP surprises, the Gold often shows a slight decrease 4 hours after the data release.

However, investor reactions to these surprises depend on their implications for the Fed’s monetary policy and short-term interest rates. While job reports were once considered pivotal for Fed decisions, their significance for the Gold market has waned over time.

Strong job reports typically signal a healthy economy, exerting downward pressure on gold prices.
Weak job reports typically signal a poor economy, exerting upward pressure on gold prices.

Key is also the fact that throughout history, gold has been viewed as a dependable hedge during periods of economic and political uncertainty, which explains why an unprecedented number of investors turned to gold in 2023 and so far this year, despite the signals for growth in the US economy even as inflation remained stubbornly above the central bank’s target! On top of that, this week data compiled by the World Gold Council showed that central banks continued adding to their gold holdings last month. This was the 9th straight month of net buying, with China still dominating purchases. Haven demand is also boosting Gold prices higher.

Click here to access our Economic Calendar

Andria Pichidi

Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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