Friday’s US jobs numbers are perhaps the most important data release of the week, with gold in particular likely to be affected. Given the uncertainty around the leadership transition at the Fed, markets could be particularly sensitive to the data this time. This is the first of two major data releases expected to be pivotal for the Fed’s policy meeting in a couple of weeks and likely to set the agenda for the dollar in the coming days. That is, as long as there is no surprise from the Middle East in the meantime.

The consensus is that the US jobs market will show signs of cooling in May, but not enough to derail expectations that the Fed will have to raise rates later in the year. Inflation was last reported to have risen to 3.8%, and if cost pressures from higher energy prices don’t ease soon, they are expected to force the Fed’s hand. Standing in the way of higher rates is weakness in the jobs market. Therefore, if the number shows resilience in hiring, it could clear the way for a more hawkish Fed and even potentially an increase in rates before the year is out.

Doves Running Out of Excuses

The main excuse used by FOMC members who want to lower rates, or to just keep rates unchanged despite inflationary pressure, was weakness in the jobs market. This applies to the Fed’s second mandate to maintain full employment, but it is also important for inflationary expectations. If wage pressure is reduced due to slack in the labour market, there is less demand-pull to raise prices, leading to lower long-term inflation. In other words, a weak jobs report increases the likelihood that inflation will be temporary and that the Fed could “look through” the recent data.

After all, headline inflation is high, but the core rate, excluding energy and food, is just two decimal places above target. And the Fed cares more about the core rate. Even with potential new guidelines from the new Chair focusing on the trimmed-mean measure, it is just one decimal point away from the target. The issue is that the Fed doesn’t want the current energy costs to bleed through to the economy, not that the economy currently has consistently high inflation. After all, it takes a few months for monetary policy to work through the system.

The Focus Is on the Jobs Market

With job creation in the triple digits over the last couple of months, it is a sign of recovery, not that everything is all good. The economy needs around 180K new jobs per month to maintain its replacement level, so the recent data shows that there is still slack in the system. A return to double digits would indicate that the jobs market is not in a good place, and the Fed has to be careful not to raise rates too much, especially if it turns out the inflation from the war is temporary.

The consensus is for May NFP to come in at 85K, down from 115K a month earlier. Meanwhile, the unemployment rate is projected to stay unchanged at 4.3%. A substantial beat over expectations, such as higher than the prior month with no downward revisions, could firm up expectations for a hike. That would likely be positive for the dollar, but weigh on gold. On the other hand, a substantial miss, such as below 70K or a tick higher in the unemployment rate, could weaken the dollar as the market prices out a rate hike later this year. This would likely support gold, however.

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