Now that markets have had a chance to digest the US electoral results, the focus turns to the next major risk event for the dollar and gold: Friday’s NFPs. This is the first of two employment data releases that the Fed will take into account when deciding whether to hike at its next meeting.
US Treasury yields have pulled back after the election and the Treasury refunding announcement, contributing to a weaker dollar and rising gold. The question is whether that trend will continue, and it could come down to Fed expectations. Falling yields imply less restrictive monetary policy, and if the labor market remains robust, could contribute to the Fed being more willing to hike at the upcoming meeting.
Markets Reassured by Election Results
As the results came in on Tuesday, afterhours markets tanked, but then turned around to surge higher on Wednesday. Notably, the Dow was vastly outperforming the Nasdaq. This is important for currency markets, because it’s an indicator of risk sentiment. AI has been one of the driving factors behind US economic growth, attracting foreign investors to US tech stocks.
The election showed a general popular backlash against aggressive data center development, threatening to slow AI expansion. That explains some of the weakness in tech stocks, and a pullback in buying dollar-denominated assets. But, the biggest factor is likely US President Donald Trump’s quick acceptance of the results. Markets were likely fearful of an extended period of uncertainty, including judicial challenges to electoral results. A clear, majority win by the Democratic party with substantial support from centrists reduces uncertainty. Traders can now focus on the data and economic developments, instead of the much less predictable political fighting. At least until next January when the new Congress takes office.
What the Markets Are Looking For
The consensus is for October NFP to come in at 65K on Friday, compared to 29K a year ago. Though the main effect on the markets lately has been prior revisions more than the number itself. The unemployment rate is projected to stay unchanged at 4.2%. What is once again becoming increasingly relevant is the average wage growth figure, which anticipated to drop to 2.9%. This is below the inflation rate, and that generally implies a drag on consumer prices.
The main takeaway for the markets is likely what the data will do to the Fed outlook. Markets have been paring back the odds of another rate hike this year, and the odds are just over 80% now.
How the Market Could React
If there is another negative print, or a substantial downward revision to the prior number, this could undermine the case for more rate hikes. Particularly if the average wage number disappoints. If the odds of a December hike fall to the 50-50 range, it could substantially weaken the dollar and give gold a solid boost.
On the other hand, a substantial beat in NFP or a drop in the unemployment rate would likely give the Fed a green light to hike in December. That would likely tighten the market a bit, at least initially supporting the dollar and weakening gold. However, that move might be short-lived as the balance of risk remains against the dollar and favoring gold.
Comments
Log in or sign up to join the conversation.