Gold slumped on hotter US NFP job data; Wall Street wobbled

On Thursday, the USD slumped on hopes & hopes of an early BOJ normalization and a less dovish rate cut path for BOE in 2024. Lower USD buoyed Gold and Wall Street Futures. Also, techs helped Wall Street after Google/Alphabet claimed its latest Gemini update for its generative AI (Bard Chabot) goes a level up against ChatGPT. Also softer than expected US jobless claims undercut Wall Street Futures and Gold briefly as a robust labor market along with elevated core inflation may keep the Fed for a longer policy stance in 2024; i.e. Fed will be less inclined for an early rate cut next year contrary to present market expectations.

On Friday, apart from ongoing Israel-Hamas Gaza war tensions, all focus of the market was also on the NFP/BLS job report for November:

On Friday, the latest BLS establishment survey flash data (seasonally adjusted) shows that the U.S. economy/employers (public and private sectors), i.e., government and private sector jobs excluding the farming/agri industry (Non-Farm Payrolls-NFP) added +199K payroll jobs in November against +150K sequentially (m/m); +290K yearly (y/y), and higher than the median market expectations of +180K.

As per the establishment survey, the change in total nonfarm payroll (NFP) employment for September was revised down by -35K to +262K, and the change for October was zero to +150K. With these revisions, NFP employment in the last two months combined was -35K lower than previously reported (against a 2M revision of -101K in the last report). After negative revisions for the last two months, the YTM average of headline NFP job addition is now around +232K in 2023 against +399K in 2022, +562K in 2021, and the pre-COVID average of +300K (against the Fed’s targeted goldilocks rate of around +200K). The 6M rolling average of NFP job addition is now around +186K.

Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +150K payroll jobs in November from +85K sequentially (m/m) and +228K yearly (y/y), slightly lower than the market expectations of +153K, but much higher than the ADP figure +103K (released Wednesday). After the last two months' revisions, the YTM average is now around +174K vs. the ADP average of +211K in 2023. The 6M rolling average of NFP private job addition is now around +130K vs. +208K ADP survey. The 2022 average of NFP Private Job addition was +377K vs. ADP average of +306K. Overall, the NFP and ADP private payroll job data is still quite divergent and thus expect huge positive revisions in December as well as yearly revision data.

The Government payroll, i.e., employment in Federal and state/local governments, was increased by +49K in November against +65K addition sequentially (m/m); +62K yearly (y/y), and higher than the market expectations of +27K. After the last two months' revision, the YTM average is now around +58K in 2023 against the 2022 average of +23K. The 6M rolling average of NFP government job addition is now around +56K. In 2023, the government payroll job addition is quite upbeat; almost double the average run rate in 2022 and now running around the pre-COVID Jan’20 levels of +60K. In 2023, Government payroll addition has been quite upbeat for the last few months including November and consistently beating market expectations. Also, the November NFP payroll headline beat (above market expectations) came on the back of the government payroll job addition.

In Nov’23, notable NFP job gains occurred in Health care (+77K), driven by ambulatory health care services (+36K), hospitals (+24K), and nursing and residential care facilities (+17K). In addition, government payrolls increased by +49K, boosted by local government (+32K) and state government (+17K). Finally, employment in manufacturing rose by +28K, slightly less than expected, as around +33K automobile workers returned to work following the resolution of the UAW strike. Also around +17K motion picture workers returned from the strike. In contrast, retail trade employment declined by -38K.

Overall in 2023, NFP payroll job additions were boosted by private education & health services, government, leisure & hospitality, manufacturing, and information/techs, while dragged by retail trade, transportation & warehousing, and professional & business services to some extent.

As per the Household survey, which includes non-farm payroll jobs/employees and self-employed persons (including professionals, contractors, and agri workers), the U.S. economy has added +747K employed persons in Nov’23, against the contraction of -348K sequentially (m/m) and contraction -66K yearly (y/y). The 2023 YTM average of the addition of employees and self-employed persons is now around +248K as per the Household survey against +239K in the Establishment survey of employees. The YTM average of the addition of employed persons was +272K in 2022, +512K & -739K in 2021-20 (COVID distorted), and +168K in 2019 (pre-COVID).

The Household survey includes payroll employees and self-employed persons such as gig workers/freelancers, contractors, and agricultural workers. In the household survey, individuals are counted only once, even if they have more than one job. In the establishment survey, employees working at more than one job (multiple job holders) are counted separately for each payroll.

 

In Nov’23, the number of employed persons in the U.S. (as per the Household survey) expanded by +747K to 161969K from 161222K sequentially (m/m) and 158527K yearly (y/y). At around 162000K employed persons, the U.S. economy is now well above pre-COVID employment levels of 158749K (Feb’20) and in line with the Fed’s standard of maximum (inclusive and broad-based) employment in line with the present labor force around 168000K.

As per household survey data, the nominal number of the civilian labor force increased by +532K in Nov’23 to 168260K. The nominal number of the labor force was around 165832 in Jan’23 and 164448 in Feb’20 (pre-COVID). The average number of additions in the labor force is around +299K against an average number of additions of employed persons +248K in 2023 (YTM). The labor force participation rate edged up to 62.8% in Nov’23 from 62.7% sequentially, near the highest since Feb’20 (pre-COVID). The labor force participation rate was 63.3% in Feb’20 (pre-COVID).

As per Household survey data, the nominal number of unemployed persons decreased by -215K to 6291K in November against 6506K sequentially (m/m) and 6000K yearly (y/y). In Nov’23, the U.S. unemployment rate edged down to 3.7% from 3.9% sequentially (m/m), and 3.6% yearly (y/y). The market was expecting an unemployment rate of 3.9% in Nov’23.

The so-called U-6 unemployment rate, which also includes total unemployed, underemployed, marginally attached, and discouraged workers (people who want to work but have given up searching and those working part-time because they cannot find full-time employment), edged down to 7.0% in Nov’23 from 7.2% sequentially (highest since May’22; lifetime/recent low was 6.5% in Nov’22).

The U.S. Average Hourly Earnings (AHE) was around $34.40 vs 34.30 sequentially (+0.35%) and 32.80 yearly (+3.96%). The U.S. AHE grew +4.0% yearly in November against +4.0% in October and is in line with market expectations of +4.0% (y/y), the lowest since June’21. Fed as well as the White House may be looking for an average annual growth rate of AHE around 3.25% on average for its +2.0% price stability targets (as per the pre-COVID trend), whereas the YTM average for 2023 (till November) was around +4.3%.

On a sequential (m/m) basis, the AHE grew by +0.4% in Nov’23 from +0.2% sequentially and above market expectations of +0.3%. The Fed needs an average sequential AHE growth of around +0.2% for its price stability targets, while the 2023 YTM average is now still around +0.3%.

The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payroll edged up to 34.4 hours in November from 34.3 hours sequentially, higher than the market expectations of 34.3 hours. Average Weekly Earnings (AWE=AWE*AWH) increased +0.65% to $1173.04 in Nov’23 from $1165.51 sequentially, while also increasing +3.66% yearly from $1131.60. This translates to average monthly earnings (AME) of around $4692.16 in Nov’23 vs. $4662.06 sequentially (+0.65%) and $4526.40 yearly (+3.66%); i.e. the AME grew +0.7% sequentially (m/m) and +4.0% yearly (y/y) in Nov’23.

The average monthly growth of U.S. AME is now around +0.3% sequentially (m/m) and +3.8% yearly (y/y) against CPI growths of +0.4% (m/m) and +4.3% (y/y); i.e., there were still no wage-inflation spirals and real wage growth is still negative. Also, the real wage growth turned negative (y/y) in Oct’23 after staying positive from June to September ’23.

 

As per the ADP survey, the number of private employees was around 129158K in October against 134031K as per the BLS survey. The difference (4873K) between the two surveys (BLS-ADP) may be the estimated number of multiple job holders, doing primary jobs full-time and secondary jobs part-time. The divergence between BLS and ADP Private Pay Roll data in the last few months may be explained by the number of multiple private jobholders (as freelancers/gig workers). ADP payroll data may have counted these categories of multiple private payroll job holders as one entity rather than multiple entries in the BLS report.

As per the ADP survey, the number of private employees was around 129254K in November against 134120K as per the BLS survey. The legacy average difference (around 5100K in 2023) between the two surveys (BLS-ADP) may be the estimated number of multiple job holders, doing primary jobs full-time and secondary jobs part-time. The divergence between BLS and ADP Private Pay Roll data in the last few years/months may be explained by the number of multiple private jobholders (as freelancers/gig workers). ADP payroll data may have counted these categories of multiple private payroll job holders as one entity rather than multiple entries in the BLS report.

In the household survey, individuals are counted only once, even if they have more than one job (based on unverified answers across 60K household samples). In the establishment survey, employees working at more than one job are counted separately for each payroll. In this way, there was a difference of around 5000K private payroll workers between the BLS/NFP and ADP surveys since /beginning.

 

In brief, the Nov’23 NFP/BLS job report may be termed a blockbuster, amid a substantial beat in the headline NFP job addition number along with huge additions in the number of employed persons, lower than expected unemployment rate and in line with expectations of yearly growth in wages, while hotter than expected sequential wage growths.

But the upbeat November U.S. job report came also on the back of subdued figures for October and if we take into account of 3M/6M rolling average (which the Fed generally considers), the overall U.S. labor market is still robust, but gradually turning goldilocks, which Fed wants for its soft landing objective. Till Nov’23, the YTD average of headline unemployment was around 3.6%. The market was concerned whether the headline unemployment rate scaled the recession redline of above 4.0% in Nov’23, but that was not the case. Fed/White House may not allow the U.S. unemployment rate consistently above +4.0% recession red lines in the election year, even while bringing core inflation down to +2.0% targets.

Overall, the Fed may not hesitate to continue its hawkish hold and higher for a longer stance on the 14th December meeting. Fed may not cut rates prematurely in H1CY24 and risks again finding itself behind the inflation curve ahead of Nov’24 U.S. Presidential Election. White House/President Biden is still concerned about the elevated cost of living for ordinary Americans prime vote box for any political party. Lower middle-class Americans are still struggling to manage regular household expenses while surviving on pay check-to-pay check.

On Friday, the UM (University of Michigan) flash data showed U.S. consumer sentiment surged to 69.4 in December from 61.3 sequentially (m/m), 59.7 yearly (y/y), above market expectations of 62.0 and the highest level since August’23, amid lower inflation expectations as oil slid. But U.S. consumer sentiment is still substantially below pre-COVID levels of around 100 amid lingering geopolitical tensions, elevated inflation, higher cost of living, and the Fed’s stance to crush real wage growths/any substantial wage inflation by keeping higher for longer policy (higher borrowing costs). Ordinary Americans may be still concerned about a possible hard landing/recession and loss of jobs in the coming months despite Fed/White House assurance of a soft landing. Meanwhile, the measure assessing current economic conditions rose to 74.0 from 68.3, while the one gauging consumer expectations surged to 66.4 from 56.8.

On Friday, UM flash data also showed US 1Y inflation expectations slid to +3.1% in December, from +4.5% sequentially, and the lowest since Mar’21 amid sliding oil, lower energy costs, and higher borrowing costs. Also, the 5Y inflation outlook/expectations slid to +2.8% in December from +3.2% sequentially.

The UM said: “There was a broad consensus of improved sentiment across age, income, education, geography, and political identification. A growing share of consumers—about 14%—spontaneously mentioned the potential impact of next year’s elections. Sentiment for these consumers appears to incorporate expectations that the elections will likely yield results favorable to the economy”.

Conclusions:

If US core CPI indeed dips below +3.0% by May-June’24 and it seems that the 2024 average core inflation will be around +3.00%, then the Fed may start cutting rates from July’24 and may cut cumulatively -1.00% at -0.25% pace till Dec’24 for a repo rate at +4.50%, so that real rate continues to stand around +1.50%, in line with present restrictive stance.

Looking ahead, the Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions to cut (dovish jawboning) from Mar’24 (Q1CY24) to ensure a soft landing while bringing down inflation. Also, whatever the narrative, the Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) endless deficit spending and mammoth public debt of almost $32T. The U.S. is now paying around 9.5% of its revenue as interest on public debt against China/EU’s 5.5%.

As a result of higher bond yields around 4.50%-5.00% (for 10Y UST); i.e. lower bond prices, the Fed is now in deep MTM loss for its huge bond holding. Fed is also providing higher interest to banks & financials for reverse repo operation than it getting under repo operation; i.e. Fed’s NIM/NII is now negative and theoretically Fed is insolvent to the tune of -$30B. The same is also true for various banks & financials, most of which are now in deep MTM loss for higher bond yields; i.e. lower prices for their HTM bond portfolio holdings due to Fed hikes. The US10Y TSY market price falls from around $140 to $105 from Jan’20 (pre-COVID) to mid-Oct’23; i.e. a fall of almost -33% in around 4 years.

This is a red flag, and thus Fed has to operate in a balancing way while going for calibrated hiking to bring inflation down to target, avoiding an all-out recession; i.e. to ensure both price & financial stability and soft-landing. Fed has to bring down inflation to +2.0% targets by ensuring US 10Y bond yield below 5.00-5.25%, and an unemployment rate below 4.0% without triggering an all-out or even a brief recession in the US Presidential election year (Nov’24). The Fed will ensure that the US10Y bond yield is below 5.00-5.25% at any cost for lower borrowing costs for Uncle Sam (U.S.), everything being equal. Thus, overall Fed is methodically jawboning on both sides (hawkish/dovish) from time to time to achieve all its goals at the same time.

Market wrap:

On Friday, Wall Street Futures and gold slid, while USD/US bond yield surged on hotter than expected U.S. NFP/BLS job report. Additionally, increasing global/UN pressure on Israel and the US to end the Gaza war immediately boosted SPX-500/Wall Street and dragged Gold and bonds (haven assets).

But the overall impact was limited as the overall U.S. labor market is now running colder than earlier or in Goldilocks mode, which may keep the Fed less hawkish policy path in 2024; the Fed may go for the much-awaited rate cuts from July’24 rather than March-May’24. Thus Wall Street Futures got some support from the kneejerk panic low after UM data showed lower 1Y inflation expectations at around +3.1%.from prior +4.5% along with higher US consumer sentiment. Wall Street got a boost of soft landing optimism while bringing inflation down towards target.

Gold also recovered from around the 1994 support zone to almost 2004 by Friday closing. Oil also got a boost on hopes of huge U.S. DOE buying for the SPR around $70-60, which the U.S. sold earlier for around $85-95 on average.

On Friday, blue chip DJ-30, tech-heavy NQ-100, and broader SPX-500 surged around +0.40%. Wall Street was boosted by energy (higher oil), techs, banks & financials, consumer discretionary, materials, industrials (hopes of a huge Chinese stimulus in 2024), and healthcare, while dragged by consumer staples, real estate, utilities, and communication services/social media to some extent. Dow Jones was boosted by Boeing, Chevron, Goldman Sachs, Intel and Microsoft, while dragged by Honeywell, Walmart, P&G, Amgen, Verizon and J&J.

Technical trading levels: DJ-30, NQ-100 Future, Gold

Whatever may be the narrative, technically Dow Future (36280), now has to sustain over 36400 levels for a further rally to 36850/37050-37350/37500 levels in the coming days; otherwise, sustaining below 36350-36200, DJ-30 Future may fall to 36050/36000-35800/35500 and may further fall to 35350/35250-35000/34800 and 34650/34120-34000 and 33700/33200-33000/32400 in the coming days.

Similarly, NQ-100 Future (16096) now has to sustain over 16250 for a further rally to 16750-16800 zones; otherwise sustaining below 16200, may fall to 16100/16050-15700/15400, and further 15100-14140 in the coming days.

Also, technically Gold (XAU/USD: 2004) now has to sustain over 1995 for any recovery to 2010/2015-2035/2045 and further rally to 2065/2075-2130/2150 areas.; otherwise sustaining below 1990, may fall to and further to 1985/1975-1960/1950 and 1928/1908-1895/1885 and 1850/1810 in the coming days (if there was a permanent Gaza war ceasefire and Fed sounds more hawkish than being expected on 14th December)