The non-farm payrolls report for October was released on Friday morning, and the results far exceeded even the most optimistic expectations. Analysts has expected the economy to add 190,000 jobs during October, but the actual NFP report number came in at a world-beating 271,000 new employees added to payrolls. The especially high jobs numbers were taken as a sign that the economy is running smoothly, all but confirming in traders’ minds that interest rates will rise in December.
In response, spot gold slid to a 3-month low of $1,087/oz this morning.
Conversely, the U.S. dollar surged to a 7-month high, registering above 99.1 on the DXY index. Nearly all of the price drop for gold (approximately 80%) can be attributed to the dollar spiking 1.3% as opposed to actual trading.
Silver was also down about 1.5% to $14.80 per ounce. Platinum fell $8 to under $950/oz while palladium actually rose $11 (1.82%) to $621/oz.
Breaking Down the NFP Report
The non-farm payrolls saw their biggest month-to-month increase from September to October in 10 months. At the same time as October’s numbers were released, the Bureau of Labor Statistics (BLS) revised September’s reading down by 5,000 to an even more abysmal 137,000. August was revised upward 17,000 to 153,000 jobs added, still a dismal showing.
The markets reacted particularly strongly to the eye-popping 271,000 number after such weak hiring in the preceding two months. For analysts who saw other economic indicators pointing to strength, the disappointing NFP report results in August and September left them scratching their heads, while October’s apparent surge confirmed their expectations. Bonds were hammered, as the 10-year Treasury yield jumped to 2.32% and the 2-year T-bill yield hovered near 0.90%, its highest since 2010.
The surge in payrolls during October helped push unemployment down to a 17-year low of 5.0%, nearly in line with the Fed’s new “full employment” target of 4.9%. It is telling, however, that the labor participation rate remains stuck at a 38-year low of 62.4%. Wages did grow 2.5% compared to the same period last year, the best year-on-year gains for wage growth since 2009.
Monetary Policy Implications
According to most observers, October’s NFP report all but confirms that the Fed will be raising rates when the FOMC meets in December barring an absolute meltdown in November. St. Louis Fed President James Bullard (pictured, left) made very hawkish statements about the economy and interest rates following the payrolls report, joining other Fed governors making similar statements this week.
On the other hand, the Bank of England’s Governor, Mark Carney, backtracked a bit in the opposite direction. Carney cited the strong pound sterling as hurting the U.K.’s economy, which has also seen sputtering near-zero inflation. This would signal that the BoE is content to wait until after the Fed—perhaps long after—to raise its own benchmark interest rate, as such a tightening of policy will only cause the pound to appreciate further. Some in the U.S. have expressed similar concerns about the USD; the continued weakening of the euro has caused both currencies to rise. While the pound and the dollar each no doubt enjoy high purchasing power, a stronger currency tends to depress exports and grow the trade deficit.
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