This nonfarm payroll report changed the game for Wall Street. Robust job growth and rapid salary gains prove the US economy is not in a slump and open the way for further significant rate hikes. After nonfarm payrolls increased by 528,000 in July, more than twice economists’ projections, the job market remains extremely tight. The unemployment rate fell to 3.5% while labour participation remained low. Wages continue to climb, adding to inflationary concerns. Employment has returned to pre-pandemic levels, and it appears that this trend will continue. A September “Fed pivot” (the idea pushed by bulls that the central bank was near the end of its tightening cycle and would start cutting rates in early 2023) is completely off the table, and the risks of a full-point rate hike could grow if the next two inflation reports remain hot. FED officials were already against the idea of a Fed pivot, and it now appears that they will debate whether they need to be even more active to combat inflation given how well the labour market is performing.
However, gold, which normally has a meltdown in every situation that calls for aggressive Fed rate hikes — and a US jobs report that is more than twice as good as expected certainly qualifies as one of those instances – fared rather well under the conditions.
Since March, the Fed has raised interest rates four times, increasing benchmark lending rates from near zero to as high as 2.5 percent. It still has three rate hikes left until the end of the year, the first of which is scheduled for September 21. Prior to the release of the jobs report on Friday, expectations were for a 50 basis point increase in September. Money market traders are already putting in a 62 percent possibility of a 75-basis-point increase next month, the same as in June and July.

It’s feasible that we’ll avoid a recession this time around. After all, despite the slowing of GDP growth, the job market remains tight and the unemployment rate is quite low. As the figure below demonstrates, the more crucial gap between 10-year and 3-month US Treasury bonds has not yet turned negative. However, it has flattened dramatically since May, plummeting to near-zero levels, and it may flip again with the next boost in the federal funds rate.

The next few weeks will truly test if gold is once again a secure refuge. Bullion traders now face two major questions: How far will the Fed raise interest rates? Can gold rise alongside a rising dollar? The next inflation data will be critical in evaluating whether a 75-basis-point rate hike is completely priced in, but if the number is considerably hotter than predicted, some may argue for a full point at the September FOMC meeting.