(Kitco News) - The Fed appears to be on the path of tightening interest rates by the second half of the year and, according to some analysts, it would take a fairly weak jobs number Friday to dissuade markets from this view.
Currently, the market is expecting the U.S. economy to have created 240,000 jobs in February, down from January’s employment growth of 257,000. Although there are signs that labor market recovery is easing, most economists are not expecting it to be enough to shift the Fed’s current outlook of continued growth.
Economists at Nomura noted that they expect 230,000 jobs to have been created last month, down considerably from the six-month moving average of 282,000 jobs.
“Nonetheless, this would still be a solid pace of growth, coming on the heels of extremely strong job gains in November and December,” they said.
There is some risk that the employment data weakens more than expected. On Wednesday, private data processing firm, ADP, said that private companies created 212,000 jobs in February, the weakest report since May.
However, most analysts noted that the ADP figures are not a great predictor of Friday’s official jobs report.
Gennadiy Goldberg, U.S. strategist at TD Securities said that it would take a “notably” weaker report to push back expectations for the first rate hike. TDS is expecting to see payrolls growth of 215,000 jobs.
Looking at the gold market, most analysts agreed that the risks are to the downside for the yellow metal as the employment data will likely confirm the Fed’s path of raising interest rates.
Sean Lusk, director of commercial hedging with Walsh Trading, said that the current trend in gold is down as the U.S. dollar and equity markets remain strong.
“The market seems to be wedging in a tight range. The probability of an extreme breakout is high,” he said. “The risk appears to be for gold to break below current levels on a positive employment number.”
Sam Laughlin, analyst at MKS agreed that the employment data should continue to support the U.S. dollar, pushing down gold prices.
“Gold continues to weaken and USD $1,198 will be the first support level, with USD $1,185 below this as the risk looks increasingly to the downside ahead of the NFP release on Friday,” he said.
However, not all analysts are convinced that gold will move lower on Friday following the data release.
George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, explained that there is a strong negative sentiment currently in the gold market and, a much weaker than expected report could create a short-covering rally.
“Anything seen as unwelcome by the market could force some bears to quickly cover their shorts,” he said.
The Federal Reserve has been fairly optimistic that the U.S. labor market will continue to improve. During her testimony before congress on Feb. 24 and 25, Fed Chair Janet Yellen said that the employment situation has been “improving along many dimensions.”
However, she added that it still does not meet the central bank’s target of maximum employment.
“In short, considerable progress has been achieved in the recovery of the labor market, though room for further improvement remains,” she said.