Gold and Dow surged on softer-than-expected NFP/BLS job report

On Thursday, Wall Street Futures jumped on Fed pivot, lower US bond yields, and increasing hopes for a humanitarian pause or even a sustainable ceasefire in the Gaza war and a permanent two-state solution to avoid the vicious cycle of violence. Also FY end (October) portfolio and fund rejig boosted Wall Street. But Apple's report card released after the market hour showed subdued guidance and sales in China. Subsequently, Wall Street Futures were under some pressure early European session on Friday. But hopes of a temporary humanitarian pause in the Israel-Hamas/Gaza war ahead of a visit by U.S. Foreign Secretary Blinken and Fed pivot was also supporting Wall Street Futures. Israel is also now under immense global pressure, even from known allies for a humanitarian ceasefire amid increasing civilian casualties in the Gaza Strip (including children and women).

On Friday, apart from ongoing Israel-Gaza war tensions, all focus of the market was also on the NFP/BLS job report for October. 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 +150K payroll jobs in October against +297K sequentially (m/m); +324K yearly (y/y), higher than the median market expectations of +180K and lowest payroll job gain since June’23 addition of +105K. The market was expecting around 210K payroll job additions in Oct’23 if there was no strike of UAW, which affected around 33K payroll jobs.

As per the establishment survey, the change in total nonfarm payroll (NFP) employment for August was revised down by -62K to +165K, and the change for September was also revised down by -39K to +297K. With these revisions, NFP employment in the last two months combined was -101K lower than previously reported (against a 2M revision of +119K in the last report).

After substantial negative revisions for the last two months, the YTM average of headline NFP job addition is now around +239K 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 3M rolling average of NFP job addition is now around +204K.

Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +99K payroll jobs in September from +246K sequentially (m/m) and +299K yearly (y/y), lower than the market expectations of +158K, but in line with the ADP figure +113K (released Wednesday). If there was no UAW strike, the private payroll job addition should be around +130K in Oct’23.

After substantial revisions (both positive and negative) throughout the year, the YTM average is now around +183K vs. the ADP average of +223K in 2023. The 3M rolling average of NFP private job addition is now around +153K vs. +127K 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 now converging gradually after the revised data collection structure by ADP in 2022.

The Government payroll, i.e., employment in Federal and state/local governments, was increased by +51K in October against +51K addition sequentially (m/m); and +25K yearly (y/y), higher than the market expectations of +29K. The YTM average is now around +56K in 2023 against the 2022 average of +23K. The 3M rolling average of NFP government job addition is now around +51K. In 2023, the government payroll job addition is quite upbeat, almost double the average run rate in 2022 and now returned to pre-COVID Feb’20 level.

In Oct’23, notable NFP job gains occurred in health care (+58K), namely ambulatory health care services (+32K) and hospitals (+18K); government (+51K), construction (+23K); social assistance (+19K); leisure and hospitality (+19K); and professional and business services (+15K). On the other hand, employment in manufacturing declined by -35K amid a -33K drop in motor vehicles and parts, largely due to UAW strike activity.

As per the Household survey, which includes non-farm payroll jobs/employees and self-employed persons, the U.S. economy has deducted -348K employed persons in Oct’23 against the addition of +86K sequentially (m/m) and contraction -156K yearly (y/y). The 2023 YTM average is now around +198K as per the Household survey against +239K in the Establishment survey. The YTM average of the addition of employed persons was +272K in 2022 and +512K in 2021 (COVID distorted).

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 October, BLS flash data indicated a +396K addition in multiple job holders to a record high of 8500K.

In Oct’23, the number of employed persons in the U.S. (as per the Household survey) contracted by -348K to 161222K from 161570K sequentially (m/m) and 158593K yearly (y/y). The U.S. economy is now well above pre-COVID employment levels and in line with the Fed’s standard of maximum (inclusive and broad-based) employment.

As per household survey data, the nominal number of the civilian labor force decreased by -201K in Oct’23 to 167728K. 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 +190K against an average number of additions of employed persons +198K in 2023 (YTM). The labor force participation rate edged down to 62.7% in Oct’23 from 62.8% 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 increased by +147K to 6506K in October against 6359K sequentially (m/m) and 6053K yearly (y/y). In Oct’23, the U.S. unemployment rate edged up to 3.9% sequentially (m/m) from 3.8%, and was also higher than 3.7% yearly (y/y). The market was expecting an unemployment rate of 3.8% in Oct’23. In Oct’23, the headline unemployment rate increased, while the labor force reduced; i.e. unemployment rate would be higher around +4.0% if the labor force increased in Oct’23 as per the trend rate of around +200K.

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 up to 7.2% in Oct’23 from 7.0% sequentially (highest since May’22; lifetime/recent low was 6.5% in Nov’22).

The U.S. Average Hourly Earnings (AHE) annual growth eased to +4.1% in September from +4.3% sequentially, +4.9% yearly, above the market expectations of +4.0% gains (y/y) and 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).

On a sequential (m/m) basis, the AHE grew by +0.2% in Oct’23 from +0.3% sequentially and below market expectations of +0.3%. The U.S. Average Hourly Earnings (AHE) was around $34.00 in Oct’23 against $33.93 sequentially (+0.2%) and $32.66 yearly (+4.1%).

The Average Weekly Hours (AWH) for all employees on U.S. nonfarm payroll edged down to 34.3 hours in October from 34.4 sequentially, lower than the market expectations of 34.4 hours. Average Weekly Earnings (AWE=AWE*AWH) edged down -0.08% to $1166.20 in Oct’23 from $1167.19 sequentially and $1130.00 yearly (+3.2%). This translates to average monthly earnings (AME) of around $4664.80 in Oct’23 vs. $4668.77 sequentially (-0.08%) and $4520.10 yearly (+3.20%); i.e. the AME eased -0.08% sequentially and grew +3.2% in Oct’23.

The average monthly growth of AME is now around +0.3% sequentially (m/m) and +3.8% yearly (y/y) against CPI growths +0.4% (m/m) and +4.4% (y/y); i.e., there were still no wage-inflation spirals and real wage growth is still negative. The average (YTM) underlying yearly wage growth is now around +3.8% against CPI growth of +4.6% in 2023; i.e., real wage growth is still negative by around -1% on average. But the real wage growth turned positive (y/y) since June’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.

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 Oct’23 NFP/BLS job report may be termed as soft/terrible, amid a huge miss in the headline NFP job addition number along with huge negative revisions, contraction in the number of employed persons, higher unemployment rate and subdued growth in wages.

There was a huge beat in the estimate for the headline NFP job addition with substantial positive revisions for the last two months (as par NFP/BLS/Establishment survey). and a plunge in the number of additions of employed persons, keeping the headline unemployment rate at 3.8% with an improved labor participation rate (as per BLS/Household survey). Also, wage growth has moderated if we consider Average Monthly Wage (AMW) amid flat AHW and lower AWH. But overall October NFP/BLS job report will not change the Fed’s ‘higher for longer stance’. And Fed is not going to hike again in December as it has almost confirmed that the rate hike cycle is almost over. Overall, the U.S. labor market is now cooling along with core inflation and by Sep’24,

On Friday, the White House said after the soft October job report:

·         U.S. Acting Labor Secretary Su said: The job report shows steady growth, and unemployment still under 4%

·         The job numbers are still inconsistent with a recession

·         WH Economic Adviser Bernstein: Job gains at this pace feel right to me

On Friday, Fed’s Barkin said after the soft October NFP/BLS job report:

·         I won't prejudge the Fed's next move

·         Contacts have been saying the jobs market normalizing

·         The labor market is in better balance

·         So far, the Middle East turmoil hasn't affected data

·         I don't know if the Fed has reached the peak of the hiking cycle

·         It was welcome to see lessening pressure on the jobs data

·         I hope and expect to see more progress in lowering inflation

·         Rate cuts are still a ways off in my mind

·         There's a good chance consumer economy is in a normal place

·         I am hearing more evidence of middle-income consumers cutting spending, and high-end consumers are not cutting back

·         Lower-end consumers are changing how they spend

·         There's some evidence that price setters see declining power, but many still have it

On Friday, Fed’s Kashkari said:

·         The labor market is slowing, that's helpful, but I don't want to overreact to one jobs report

·         There's a lot of uncertainty around what's driving the yield curve

On Friday, Fed’s Bostic said:

·         Policy is likely in the right place given the economic outlook

·         As 2% inflation gets closer, the Fed will have to weigh interest rate levels

·         A policy shift would be warranted before inflation at 2%

·         I think we're in restrictive territory today

·         I expect to see inflation cooling into next year

·         I welcome more moderate wage gains

·         Wage pressures are developing in a good direction

·         If inflation continues to wane it confirms Fed policy is in the right place

·         If inflation expectations creep up, we've got to act

·         I expect growth to moderate to a methodical pace

·         I don't have a US recession in my forecast

·         I may support holding rates for about 8-10 months

·         Tighter credit conditions will be a drag on the economy

·         Credit has tightened but there is still more to come

·         I am expecting slow and steady inflation progress

·         It is likely the Fed policy is in the right place given the economic outlook

·         The Fed still has time to watch and be patient

·         Longer-term trends show the economy moderating

·         I am hoping for minimal pain for the economy

·         I am pleased with the jobs report number

Conclusion:

The Fed will be on hold with a hawkish stance in December too and hold the same at least till Sep’24; the Fed tightening cycle is now almost over (if there is no abnormal surge in core inflation in the coming months)

The average sequential rate for U.S. core CPI (seasonally unadjusted) was around +0.11% in 2020, +0.45% in 2021-22, and estimated +0.35% in 2023. At a current average sequential rate of +0.25% in the last few months, the annual core CPI should be around +4.3% in Dec’23 against +5.7% in Dec’22.

Looking ahead, if the rate of average sequential core CPI further declines to around +0.25% in 2024 and +0.15% in 2025, then the annual core CPI would be around +3.0% by Dec’24 and +2.0% by Dec’25-in line with Fed’s present projections. Thus there is a need for a higher restrictive rate for longer policy at least till Sep’24. By Sep’24, U.S. core CPI should be around +3.0% and then the Fed may go for rate cuts of at least -50 bps a quarter to +5.00% and keep the real rate around +2.0% (compared to core CPI), still in the restrictive zone. In 2025, the Fed may further cut -2.0% for a repo rate of +3.00% against likely core CPI of around +2.00%. The market is now assuming the first Fed rate cut in June vs prior July after a softer-than-expected October NFP/BLS job report. Also, Fed swaps showed more than -100 bps of easing prices for 2024!

Thus Fed is preparing the market for a hawkish hold stance in H1CY24 with an end to the current tightening cycle. Fed may go for a hawkish hold policy action/stance amid excuses of Israel-Hamas war/simmering ME geopolitical tensions and rising 10Y US bond yield. But the Fed may continue to project at least another hike in December and one hike in H1CY24 (March/June) to continue its hawkish hold stance and to ensure tighter financial conditions and also Fed credibility. The Fed is now preparing the market for higher for longer policy.

As per Taylor’s rule, for the US:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(5.50.00-2.00) =0+2+3.50=5.50%

Here:

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= average core inflation (CPI+PCE) =5.50% (for 2022); H1CY23 average core inflation around +5.40% (~5.50%)

Fed may not hike further, keeping the terminal repo rate at +5.50% with a hawkish hold stance at least till H1CY24. Similarly, ECB and BOE will continue to be on hold with a hawkish bias at +4.75% and +5.50% respectively; i.e. we have a synchronized global hawkish hold stance by major G4 central banks (Fed, ECB, BOE, and BOC) to ensure tighter financial conditions, lower demand/economic activities and lower inflation expectations/lower inflation.

Looking ahead, the Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions to cut from June’24 (H2CY24) to ensure a soft landing while bringing down inflation. Also, 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%. 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 stability and soft-landing.

Market wrap:

On Friday, Wall Street Futures jumped on hopes of an Israel-Hamas/Gaza humanitarian pause and also a Fed pause and an early rate cut by June’24 instead of earlier Sep’24 assumption by the market. Although U.S. Foreign Secretary Blinken is trying for some compromise/humanitarian pauses and meeting almost all the stakeholder states/countries in the Middle East, Israel is not ready for a ceasefire until all the hostages are released by Hamas. But the good news is that despite growing global pressure on Israel for a ceasefire, and the genocide-like situation IN Gaza coupled with an increasing confrontation with Hezbollah in Lebanon border, so far U.S. has been able to ensure no wider regional conflict/war involving Iran.

On Friday, the USD/US bond yield slid, while gold, silver and Equities jumped on softer than expected NFP/BLS job report for October. Wall Street was boosted by real estate, materials, communication services, banks & financials, consumer discretionary, techs, industrials, utilities, healthcare and consumer staples to some extent, while dragged by Energy (lower oil on ease of Gaza war tensions). Gold also eased from around 2005 to almost 1989 before closing around 1992. Overall, Apple dragged Wall Street on subdued guidance.

Technical trading levels: DJ-30, Gold

Whatever the narrative, technically Dow Future (34184), now has to sustain over 34300 for any further rally to 34500/34650 and 34855 and further to 35375-35875 in the coming days (if there is a Gaza ceasefire/Israel ends it's intensifying surgical/military operation).; on the other side, sustaining below 34250, Dow Future may again fall to 33950/33650-33450/33150 and 32950/32650-32300/32200 and 32000/31750-31595/31190 and even 29400-28475 levels (in case of a wider major regional military conflict).

Technically, Gold (XAU/USD: 1990) now has to sustain over 2012 for a further rally to 2022/2038-2055/2085; otherwise sustaining below 2005-1995/90 may further fall to 1997/1980-1975/1955 and 1945/1934-1924/908 and further 1894-1805 in the coming days.