Weak US Jobs Report Cools Rate-Hike Bets and Lifts Gold Off Its Lows

American employers added only 57,000 workers in June, far below forecasts, prompting traders to scale back expectations that the Federal Reserve under its chair, Kevin Warsh, will raise interest rates this summer.

The United States labor market slowed sharply in June. Employers added just 57,000 jobs, roughly half the 115,000 that economists surveyed by Dow Jones had expected, according to CNBC's account of the Labor Department release. The unemployment rate fell to 4.2 percent. That decline happened mainly because the share of adults working or looking for work dropped to 61.5 percent. A falling participation rate that pulls unemployment down signals weakness rather than strength.

The reaction in interest-rate markets was immediate. Before the report, futures priced roughly a 65 percent chance of at least one Federal Reserve rate increase by September. Within minutes that fell to about 50 percent, CNBC reported. The dollar weakened over the week, and gold recovered. Spot gold rose about 1.15 percent to roughly $4,170 an ounce on July 3 and climbed back toward $4,200 as traders reduced their bets on tighter policy.

That rebound follows a steep pullback. Gold has fallen close to 7 percent over the past month from around $5,597 an ounce, a level it reached in late January. Indian analysts quoted by the Economic Times described that move as a technical correction driven by a firmer dollar, elevated bond yields and the expectation that rates would stay higher for longer. The June data undercuts part of that argument.

Kevin Warsh, the Federal Reserve chair who has moved the central bank toward a harder line and away from explicit forward guidance, now faces data that argue against a near-term increase. From a sound-money perspective, the report exposes the tension at the center of the current cycle. Years of cheap credit lifted asset prices well above what the underlying economy could support, and a labor market that adds only 57,000 jobs while people leave the workforce is the kind of real-side weakness that easy policy tends to conceal. Continued buying of gold through the correction reflects a persistent doubt about how durable the disinflation and the strong dollar really are.

What this means

The single monthly number that markets watch most closely shifted the odds on Federal Reserve policy more than any official has this week. If hiring keeps cooling, the case for further tightening erodes, the dollar softens, and the hard-money assets that lost value during the higher-for-longer period regain support. The direction of the Fed's next move, not just its timing, is now genuinely in question.

What to watch

Revisions to the June and May payroll figures in the next report, because large downward revisions would confirm the slowdown is real rather than a short-term statistical anomaly.
Whether Warsh and other Federal Reserve officials publicly acknowledge the weaker labor data, which would signal how much a Fed without formal guidance is willing to shift its stance in response to a single report.
The dollar's trend against major currencies, since sustained dollar weakness typically pushes gold and other assets that pay no yield higher.

Weak US Jobs Report Cools Rate-Hike Bets and Lifts Gold Off Its Lows

Townsquare

Comments