Unquestionably, tomorrow’s release of the U.S. Labor Department’s jobs report for July will be an important component that will shape and determine adjustments to the current monetary policy of the Federal Reserve. The Fed has underscored that their decisions in terms of when they will begin to taper, as well as normalizing interest rates, are tied directly to the state of the economy. More so, they have adjusted their dual mandate which was to facilitate full employment and maintain a target inflationary rate of 2% to focus upon full employment while letting inflationary rates run hot. Their rationale is that much of the current upticks in inflationary pressures are transitory and will be alleviated as the country continues to rebound returning to a much more robust economy.
While there are many analysts that question whether or not a majority of the higher inflationary rates might be sticky (sustainable) rather than transitory. The vast majority of analysts are in agreement that the supply chain bottlenecks created by the reopening of the economy will not be sustained and will likely abate as the economy strengthens.
However, even the Federal Reserve has acknowledged that inflationary pressures are much larger than they anticipated and may be present for a longer time than they originally predicted. They have also acknowledged that the current path of fiscal stimulus coupled with quantitative easing as well as interest rates near zero is unsustainable.
Currently, the CPI (Consumer Price Index) shows that currently, inflationary pressures have grown by approximately 5.5%. However, the Federal Reserve prefers to use the PCE index (Personal Consumption Expenditures Price Index). This inflationary index strips out changes in inflation in energy and food costs. That being said, according to the Bureau of Economic Analysis the PCE for June 2021 came in at 4% (Change year over year). Even though the Federal Reserve has said that they will let inflationary rates run hot, even Chairman Powell acknowledged that they did not expect the PCE to rise to double their current mandate.
This brings us to tomorrow’s jobs report by the U.S. Labor Department. Initial estimates by economists polled by Dow Jones are anticipating that tomorrow’s report will show an improved payroll growth as the unemployment rate falls. Currently, they are forecasting that the report will show that 865,000 new jobs were added in July versus the 850,000 new jobs added in June. They're also forecasting a downtick of 0.02% in the unemployment rate from 5.9% in June to 5.7% in July.
According to Yahoo Finance, “U.S. employers likely added back the most jobs last month since August 2020, with payroll gains moving up in tandem with improving economic activity and consumer mobility during the recovery. Downside risks remain, however, especially as employers work through lingering labor shortages and the Delta variant tears across the country.” If these estimates are correct it would mark the largest employment numbers in nearly a year with the unemployment level falling to the lowest level since the onset of the Covid-19 pandemic in March 2020.
However, other economists greatly differ in their estimates for tomorrow’s report. Yahoo Finance reported that “though job growth will likely still be well above pre-pandemic trends, some economists warned that the consensus estimate for July's payroll gains may be excessively upbeat. Since the June jobs report, the Delta variant has swept across the country, exacerbating many workers' concerns over becoming infected in the workplace. Plus, difficulties finding childcare over the summer and the ongoing support of federal unemployment enhanced benefits have lingered, generating a confluence of factors that may have kept more individuals sidelined from the labor market.”
Alex Pella, a U.S. economist for Mizuho Securities USA, wrote in a note on Wednesday that, “Our view is that the street is overly optimistic and that both payrolls and the unemployment rate are likely to disappoint." He also said that, "At a high level, trend is a powerful force. The three-month average of job growth is running near 570k per month, and 870k would represent a meaningful acceleration from that trend. Moreover, this would be occurring in the context of clear deceleration in growth momentum, especially for the U.S. consumer, which makes the prospect of such a marked acceleration even less likely."
Brad McMillan, chief investment officer for Commonwealth Financial Network, wrote in a note that, "Beyond the rising medical risks, the job market also faces the question of whether the labor shortage is starting to get better…Medical risks make workers less likely to move back into the labor force, which is a headwind. But there were expectations that the expiration of federal supplemental employment benefits would start to force workers back, which would be an offsetting factor. One of the key takeaways from this report will be whether that shift is happening — as preliminary data suggests it is not."
Lastly, although ADP’s private-sector report typically does not have a strong correlation to the Labor Department report which is released two days after the release of ADP’s report, over this last year there is been a much higher correlation between the two reports than in previous years. If that trend continues the disappointing numbers of ADP’s report yesterday which came in at a disappointing addition of just 330,000 private sector jobs being added compared to the initial forecast of an additional 690,000 jobs being added could spill over into July’s jobs report from the US Labor Department.
Paul Ashworth, the chief U.S. economist for Capital Economics, wrote in a note that, “If the ADP is to be believed and employment growth has slowed again, then that would support the doves who appear to want to wait until early next year to begin the taper."
The importance of tomorrow’s jobs report cannot be underestimated in that it is the last employment data that the Federal Reserve will have ahead of the Jackson Hole symposium which will run from August 26 through August 28. Regardless of the Labor Department’s jobs report tomorrow it is clear that if the numbers come in at current forecasts it would create additional bearish market sentiment for the safe-haven class, gold. At the same time if it comes in well under forecasts as some analysts are anticipating it would provide strong bullish tailwinds for gold to move higher as it would force the hand of the Fed to expand their time frame as to when they will begin tapering their monthly asset purchases and raise interest rates.
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