Fridays employment report from the Bureau of Labor Statistics (BLS) had been eagerly anticipated by the markets, especially after the previous weekends Federal Reserve Jackson Hole conference where Janet Yellen waved the banner of data dependency for guiding future Fed rate hikes.
Coming out of the Feds central bankers confab, expectations for a September rate hike had climbed higher, although there were more than enough doubts about the economy to temper the markets projections. The August jobs report was to be data dependencys big moment to tell the market if or when interest rates would rise this year.
What we got from the BLS last week was a softer jobs number than many had anticipated151,000 new jobs created in August, compared with expectations of around 180,000 new jobs. The unemployment rate remained steady at 4.9% and hourly wages grew by 0.1%.
Not only did the August report undershoot expectations, it also represented a significant drop from the previous two months, when over 270,000 new jobs were created in both June and July.
The odds of a Federal Reserve September rate hike took an immediate hit after the release of the August report. As of Friday morning, the market saw around a 24% probability of the Fed hiking rates by a quarter-point at the September 21 Federal Open Market Committee meeting. Odds of a Fed rate hike by the December 14 FOMC meeting were around 50% as of the close of business on Friday.
Gold prices spiked to as high as $1326/oz right after the jobs report was released, but were settling lower by mid-morning. Gold investors would prefer to see interest rates remain low for longer, and the underwhelming employment numbers would seem to bolster that case.
The August jobs report was not entirely disappointingit wasnt as bad as Mays shocking job growth figure of just 24,000 jobs created that month. A number under 100,000 for August would have been more distressing.
If anything, Augusts weaker-than-expected employment report brings some clarity to potential Federal Reserve moves in the near-term (as in September). But as for the longer termmeaning, through the end of this yearthe picture for Fed rate hikes remains muddy. That uncertainty should help keep gold prices elevated over the next few months.
The soft job-growth number for August may also indicate an even slower pace for Fed rate hikes going forward. Last December, when the Fed raised the Fed funds target rate for the first time since lowering to near-zero during the 2008 financial market crisis, Fed officials had projected four rate hikes throughout 2016. That pace of rate increases was said to be gradual at the time.
Now, we may only get one rate hike at all for 2016at the last possible Fed meeting for the year. This clearly is not the gradual pace that the Fed intended last year. As long as the economic climate remains murkysolid employment but tepid growth and below-target inflationliftoff for Fed rate hikes will likely be delayed further, much to the delight of the gold market.