The U.S. economy added 271,000 jobs in October. What does it mean for the Fed policy and the gold market?

While the September jobs report was a disaster, the October number was marvelous. The U.S. economy gained 271,000 jobs, much more than in September (137,000 after revision) and much more than expected (the Bloomberg consensus was 190,000). Importantly, all but 3,000 jobs came in the private sector, according to the Bureau of Labor Statistics. The unemployment rate (U-3) fell from 5.1 to 5 percent, the civilian labor force participation rate was unchanged (at 62.4 percent), while the average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $25.20 (or 2.5 percent on an annual basis), following little change in September.

Undoubtedly, that sort of monthly variation can just be a statistical error, but investors do not care about methodological details. The recent report is the strongest since December last year and it sets the stage for the Fed to raise interest rates this year. According to CME Fedwatch Stats, the odds of a December hike increased from 58.1 to 69.8 percent after the jobs report was released. This is not good news for the gold. Following the strong labor market data, the U.S. dollar rallied to a near seven-month high, while the U.S. Treasury debt prices fell, meaning that interest rates are already rising in anticipation of the Fed’s move. Rising interest rates combined with the appreciation of the greenback are usually very bearish for gold.

The bottom line is that the October U.S. nonfarm payroll report was surprisingly positive. The strong labor market bolsters the case for a rate hike this year (especially that the recent comments from Fed officials supported the idea that a December rate increase was a distinct possibility). The recent employment report will strengthen the negative outlook for the price of gold, which began with the unexpectedly hawkish FOMC statement in October.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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