Non-agricultural heavy hits, how should gold be deployed?

There was a lot of bad news in the market on Monday (Oct. 4) on the first trading day of October. Among them, the U.S. ISM manufacturing index in September was less than expected, as well as a weak credit market and rumors about the collapse of Credit Suisse, which increased the possibility that the Fed will eventually turn in the turmoil. Note that the Fed will cut rates as early as May 2023. The yield on the 10-year U.S. Treasury bond fell from a high level, plummeting 26 basis points, for the first time this year, spot gold rose sharply, hitting a new high in nearly three weeks, and finally closed up 2.13%. This Friday, the non-farm payrolls data will be ushered in, and this time the non-farm payrolls data is particularly important as the Fed raises interest rates and has reached a new crossroads.

What is non-agricultural?

The full name of non-agricultural employment is the non-agricultural employment report, and the corresponding English is Non-farm Payroll report, abbreviated as NFP. The nonfarm payrolls report is an employment indicator released by the U.S. Bureau of Labor Statistics (BLS) that measures the number of net jobs added by the U.S. economy each month, or the change in nonfarm payrolls. Also released at the same time are the unemployment rate, average hourly wages, average weekly hours worked, and labor force participation rates.

Normally, the nonfarm payrolls report is released on the first Friday of every month at 8:30 a.m. ET. Converted to GMT+8 time, it is 20:30 on the first Friday of each month, and winter time is correspondingly delayed by 1 hour.

It is worth mentioning that the market usually pays the most attention to changes in non-farm payrolls. But sometimes, the market will pay more attention to the situation of the unemployment rate. Also, if the Fed pays a lot of attention to wages in a particular period, changes in wage growth data will have a bigger impact, as was the case for a while in the Janet Yellen era.

Why is nonfarm so important?

Non-farm payrolls are so important because the core driving US economic growth is consumption (about 70% of GDP), and the health of the labor market and wage growth will have a direct impact on consumer spending. If employment continues to grow at a healthy rate and wages continue to rise at a reasonable rate, people with more money will be more inclined to buy the goods, services and even luxuries they need, thereby driving overall economic growth. And vice versa, if the labor market is weak, jobs are hard to find, and the number of unemployed is rising, the cash-strapped people tend to “shrink their clothes” and spend as little as possible, resulting in sluggish economic growth and even a recession. .

In addition, as I mentioned in Chapter 6 of Gold Trend Analysis, the Fed's dual mission includes maximizing employment and maintaining price stability. Therefore, the non-farm payrolls report, which reflects the health of the labor market in a timely manner, may also have a direct impact on the Fed's monetary policy.

How to use non-farm traded gold?

Typically, in the short term, we will judge the likely reaction of gold prices based on how far the actual results deviate from market expectations. Mainly divided into the following three situations:

1. Actual results are better than expected

Taking the change in the number of non-farm payrolls as an example, if the number of new non-farm payrolls is unexpectedly significantly higher than the market consensus, it means that the demand for labor in the United States remains healthy, and the economy is improving, which is good for the US dollar and negative for US dollar-denominated gold. . Especially when the Fed is about to adjust its monetary policy cycle, unexpected changes in non-farm payrolls can often stimulate investors to re-price the Fed's policy path and exacerbate market volatility. At this time, take a short-selling strategy on gold or take the election.

2. The actual results are in line with expectations

If the actual results are in line with market expectations, the impact on the dollar and gold may be very limited given that the market has basically fully priced the data before the data is released. But at the same time, it does not rule out the possibility of "buying news and selling facts" in the market. Investors are advised to stay put and observe market developments.

3. The actual result is worse than expected

If the actual result is significantly worse than consensus, suggesting weak demand in the U.S. labor market, which in turn could spark investor fears of sluggish U.S. economic growth or even a recession, the dollar could face a sell-off while gold is expected to rise. In this context, it is a good strategy to choose the opportunity to buy gold on dips.

In any case, keep in mind that a single data is unlikely to change the trend of the market, and non-farm payrolls are no exception. Therefore, the above recommendations mainly apply to ultra-short-term operations. In addition, the market may face the risk of violent shocks before and after the release of heavy economic data, and it is necessary to adjust positions in advance and protective stop losses.

Summarize

The impact of non-farm payrolls on gold is mainly based on the degree of deviation between actual results and market consensus. Better-than-expected results tend to boost the U.S. dollar and bearish gold; conversely, worse-than-expected results usually weigh on the U.S. dollar and give gold an opportunity to rise; in line with expectations, the impact may be very limited. In short, the non-agricultural impact is relatively short-lived, and a single data is unlikely to change the market trend. Maintaining good risk management at all times is the key to ultimately achieving profitability.