ADP Proves to Be Another Feather in the Fed’s Cap

Market Trends - 08/03/2017

Although the much-awaited Friday jobless figure is just days away, early indications are pointing to  strong gains following the most robust private employment reading since December of 2015.  According to Automatic Data Process, Inc. (ADP), private companies added 298,000 new jobs in February compared to 261,000 in January.

Besides the services sector, which notched another month of robust gains, the goods-producing sector added a record 106,000 jobs. Hot on the heels of promises to keep jobs in America and repatriate significant manufacturing employment, the industrial sector added 32,000 positions during the latest reading while construction jobs for the period rose by 66,000.

Despite a looser correlation to the nonfarm payroll figure published by the Bureau of Labor Statistics, at this point, any data reported on Friday that either matches or beats expectations is likely to pave the way for the 25-basis point rate hike priced in by financial markets.

Reflecting this sentiment was the sharp uptick in Fed Funds futures since the announcement was made.  Rebounding from the retreat to an 81.90% likelihood reported on Tuesday, the probability of action during next week’s FOMC decision has now risen to 88.60% per the CME Group’s FedWatch tool.

The resulting spike in the US dollar that has materialized following the ADP announcement has managed to knock gold down another peg, with prices now trending below $1210 per troy ounce.  The next major level to watch on the downside should market sentiment turn fully hawkish would be the psychological support sitting at $1200.

While there are an abundance of factors that could add a moderate risk premium to gold, such as the growing tensions with North Korea, gold at present looks content to resume its strong inverse relationship to US dollar-based developments.

Should Friday’s unemployment data continue the positive streak, gold may resume the prevailing longer-term downtrend, pushing prices back towards $1000 per troy ounce.

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