Global markets await critical U.S. jobs data as the Federal Reserve signals a cautious approach to rate cuts amid rising inflation risks. Meanwhile, gold maintains momentum despite dollar strength, China battles deflation while supporting its currency, Japan faces consumption challenges, and Australia sees increased speculation of rate cuts as inflation eases towards the RBA's target range.
All Eyes on Nonfarm Payrolls: A Test for Fed's Monetary Policy Strategy
As markets digest the week's economic data and comments from Federal Reserve officials, attention now turns to critical jobs figures set to be released later in the day.
The FOMC minutes from December, published on Thursday, highlighted the Fed's intent to slow rate cuts amid rising inflation risks and uncertainties stemming from the incoming Trump administration.
The minutes noted higher inflation, continued consumer spending strength, an improving labor market, and reduced downside risks to economic activity. A striking takeaway was the consensus among nearly all officials that upward inflation risks were increasing.
Additionally, remarks from several Fed officials this week reaffirmed the central bank's cautious stance. Boston Fed President Susan Collins stated that the economy faces significant uncertainties, justifying a more measured approach to adjusting interest rates. Similarly, other officials echoed this message, emphasizing that policy would remain data-dependent.
Meanwhile, some officials believe that policy rates are nearing neutral territory — neither restrictive nor stimulative for the economy. Kansas City Fed President Jeff Schmid suggested that rates may now be close to their long-term levels. Governor Michelle Bowman shared a similar view, arguing that the current rates might not be overly restrictive for the economy.
Responding to questions about President-elect Donald Trump's policies on tariffs, taxes, and immigration and their potential impacts on the economy and inflation, officials collectively stated that it is too early to assess the effects. They emphasized the need for greater clarity to understand how these policies will affect economic activity, the labor market, and inflation.
On the other hand, officials believe that the labor market remains robust, but they also note that they do not wish to see further cooling. In this context, the trend in labor market data in the coming period will be a key determinant of the Fed officials' stance.
Later today, U.S. payroll growth and unemployment figures are expected to underscore a solid labor market, bolstering the Fed's cautious stance. According to the median forecast in a Bloomberg survey of economists, nonfarm payrolls likely increased by 165,000 in December.
This would indicate that U.S. employers continue to add jobs at a healthy pace while supporting the narrative of gradual moderation. The unemployment rate is projected to hold steady at 4.2%.
Meanwhile, Wednesday's ADP Employment Change report, considered a leading indicator for nonfarm payrolls, fell short of expectations. The report showed that private-sector hiring slowed to 122,000 in December from 146,000 in November, missing economists' median projection of a 140,000 increase.
The ADP report revealed mixed hiring trends across sectors. Education, health, construction, leisure, and hospitality saw the most significant job gains, while manufacturing, mining, and professional and business services experienced job declines.
This report supports warnings by some economists that the U.S. labor market continues to show signs of weakness, with hiring concentrated in only certain sectors.
Additionally, a separate report on Thursday noted a continued rise in the number of people claiming unemployment benefits, suggesting that some unemployed individuals are struggling to find new jobs. While these factors do not yet indicate significant deterioration in the U.S. labor market, they highlight the need for the Fed to keep an eye on labor conditions even as inflation risks take center stage.
Economists' forecasts for today's nonfarm payrolls range between 100,000 and 268,000. The outcome will shape market expectations for the Fed's pace of rate cuts this year. As Fed officials have emphasized, a strong labor market would increase the likelihood of a slower pace of cuts. Conversely, a weak reading could prompt the Fed to adopt a more accommodative stance in the coming months.
Strong Dollar Fails to Deter Gold's Momentum Amid Fed Policy Speculations
As the outlook for Fed easing continues to be evaluated, gold maintains its upward momentum for the fifth consecutive trading day, despite a strengthening dollar. Trading around the $2,675 per ounce level, gold has reached its highest levels in the past month.
Expectations of a stronger U.S. dollar in the coming period had dampened the outlook for gold prices. While gold continues to be supported by central bank purchases and safe-haven demand driven by geopolitical and political uncertainties, higher U.S. dollar yields typically reduce gold's appeal.
However, as Fed officials adopt a cautious stance on rate cuts, potential weakness in the labor market could push the Fed toward further easing in the future. Lower interest rates are generally favorable for non-yielding assets like gold.
Amid market uncertainties leading up to Donald Trump's inauguration, traders are looking for new catalysts to gain insights into the period ahead. A survey conducted by 22V Research reveals that most investors are paying closer attention than usual to today's jobs report.
This report will serve as the final key data point shaping expectations ahead of the inflation figures to be released just days before Trump takes office.
China's Balancing Act: Stimulating Consumption vs. Supporting the Yuan
China's consumer inflation weakened further toward zero in December, highlighting deflationary pressures, according to data released on Thursday. The Consumer Price Index (CPI) rose by just 0.1% year-on-year, while factory deflation extended to its 27th month, with the Producer Price Index (PPI) falling by 2.3%.
Amid potential headwinds for exports due to tariff threats from the Trump administration, China must stimulate domestic consumption to sustain economic growth. In this context, authorities appear to be taking more concrete steps, as they pledged earlier this year.
On Wednesday, the Ministry of Finance announced that consumers would be eligible for a 15% subsidy on purchases of new smartphones, tablets, or smartwatches priced under 6,000 yuan ($818). The announcement also stated that the number of home appliances eligible for state support would increase from eight to twelve. Additionally, funding for industrial equipment would be expanded.
Meanwhile, the People's Bank of China (PBoC) announced it would halt sovereign debt purchases this month due to bond supply falling short of demand. Economists believe this move is aimed at supporting the yuan's exchange rate.
This decision could dampen speculation of aggressive monetary easing, which had intensified after officials promised a more accommodative policy stance last month. Indeed, data from China's money markets suggests some traders are already betting that easing measures may be delayed to bolster the yuan.
In the coming months, the PBoC may face a difficult choice between defending the yuan and supporting a weakening economy.
BoJ Faces Tough Choices Amid Mixed Economic Signals
Early data released during the day indicates that Japanese households have continued to cut back on spending for the fourth consecutive month, as inflation continues to erode their purchasing power. Inflation-adjusted consumer spending fell by 0.4% in November.
While this decline was better than the expected 0.6% drop, the metric has increased in only two of the past 12 months, highlighting a persistent downward trend in consumption.
Additionally, data released on Thursday showed that wages rose by 3%, marking the highest increase in 32 years. However, inflation continues to outpace wage growth, leaving consumption fragile. This has heightened expectations that the Bank of Japan (BoJ) might take a more cautious approach to raising interest rates.
Meanwhile, the BoJ noted progress in wage increases but provided no clear hints regarding a potential rate hike at its January monetary policy meeting. Economists believe the BoJ may wait for the results of spring wage negotiations, suggesting that a rate hike is more likely in March or April.
Additionally, they point out that waiting could be a prudent choice, as it allows for some resolution of uncertainties linked to policies introduced under Trump.
On the other hand, while expectations of a potential January rate hike have slightly cooled, traders remain on high alert due to the risk of intervention by authorities. Speculation has grown that officials may step in if the yen crosses the psychologically significant 160 mark against the dollar. This has, for now, been helping to limit the yen's depreciation despite the strengthening dollar.
Traders Bet Against Australian Dollar Amid Easing Speculation
A key measure of inflation in Australia eased in November, moving closer to the Reserve Bank of Australia's (RBA) target range of 2-3%. Data released on Wednesday showed that trimmed mean inflation, the RBA's preferred measure, fell to 3.2% from 3.5% in the previous month.
This development has fueled speculation that the RBA may lean towards easing monetary policy, especially with Trump's tariff threats looming. According to money market data, the likelihood of a rate cut at the February meeting is priced at 70%.
Meanwhile, separate data released on Thursday revealed that retail sales in November rose less than expected, despite Christmas and Black Friday discounts. This indicates that consumers remain cautious, providing further justification for potential rate cuts.
Following the weak economic data, traders have increased their short positions against the Australian dollar. According to Commodity Futures Trading Commission data, activity in contracts expiring by April at 60 cents or lower has increased.
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