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Jobs report favours Fed, PMIs indicate slowing services

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By Craig Erlam  

The Federal Reserve could not have hoped for a better NFP jobs report on Friday, but it will need to be one of a number of positive economic reports over the coming months before it’s ready to declare victory.

The headline non-farm payrolls miss combined with the -101,000 net revision was big and policymakers will be hoping it’s a sign of things to come rather than a blip in the data.

We have been seeing the U.S. labour market cooling slightly, but just not nearly enough until now and this could be a sign of that accelerating.

The average hourly earnings figures were also very positive, with the monthly number at 0.2% being the second such print in three months.

What would have been the third was instead revised up to 0.3%. But even then, that’s three extremely encouraging months of wage figures that will give the Fed hope that wages are almost sustainable with 2% inflation.

Further slowdown in services PMIs

Friday’s services PMIs collectively painted the picture of consumers who are feeling the pinch following two years of inflation and rapidly rising interest rates.

Pandemic savings have softened the blow in that time and inhibited central banks’ ability to rein in inflationary pressures. But they appear to be providing less of a buffer now which could hit economic activity further, if the surveys are to be believed.

Of course, those of the US and China remain in growth territory – just – but they’ve fallen quite a lot since the start of the summer.

The UK PMI is slightly in contraction territory which is a blow, but we have seen some improvement over the last couple of months.

Broadly speaking, we’re not far from the 50-divide between growth and contraction. This could be the sweet spot for policymakers as it weighs on activity, reduces demand, and allows inflation to fall without triggering a significant recession.

Oil slips again on back of weaker US data

All of this softer data may have come as a relief to Fed policymakers, but it’s weighed on crude oil, with a weaker economy meaning softer demand.

WTI is now trading back at the level it was before Hamas attacked Israel, while Brent still has a little way to go.

That will, to some extent, be due to the fact that it hasn’t yet led to a more significant conflict in the Middle East – a hugely important region for oil output – as well as weaker economic prospects, as we’ve seen on Friday.

Is $2,000 too big a barrier for gold?

The jobs report gave gold a big lift, as traders viewed it as further evidence that another rate hike will not be needed.

The yellow metal rallied above $2,000 again – the fourth session in the last six it’s traded above here – before once again being pushed back. This is clearly a big psychological barrier and momentum indicators suggest it may be a struggle at this time.

There’s been a lot of positive economic data and Fed commentary recently and if that hasn’t been enough to deliver a significant breakout, you have to question whether the rally of the last month has run its course.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.