Good morning, traders. Welcome to our weekly preview of the stories, events, and economic data on our radar this week that could have the biggest impact on gold its correlated markets. With the dominant narrative for global markets still coming out of China at the start of the week, wheels are already turning so we’ll jump right into the coverage.
Gold prices are stuck on the backfoot this morning, trading roughly $10 below last week’s close following a strong gap higher as global markets reopened Sunday evening, and then a steady crush of selling pressure on the yellow metal. Silver has also lost ground, falling back below $18/oz once again.
The weakness in gold this morning is at least partially driven in opposition to strong futures trading in US equities (which are now making gains as the cash market has opened,) and a higher Dollar. This will likely keep risk appetite elevated through the market day as European and US stocks seem to have shrugged-off the ugly post-holiday open for Chinese equities this morning that was wholly expected. The other weight around gold’s neck to begin the week is an immense amount of pressure on the broad commodities index, led by falling oil prices. With the fear levels around the coronavirus outbreak moderating, if not falling, gold’s natural safe have utility just isn’t enough to avoid the selling we’ve seen across all commodities as the health crisis in China is expected to seriously dent demand of raw materials.
On the data front, we have a light week. Manufacturing and services PMIs are of interest, but the main player in Friday’s jobs report. I’ll also be keeping an eye on the US-China trade relationship, with China throwing some barbs at the US response to the coronavirus over the weekend I wonder in tensions will reappear sooner than expected as China’s central bank is being forced to combat the economic damage with measures that the US has been clear it finds unacceptable.
US Economic Data to Watch
Monday, February 3 at 10am ET // ISM Manufacturing PMI (Jan)
[consensus expectation: 48.5 // previous: 47.2]
Despite the fact that regional manufacturing surveys for January have generally picked up some pace, consensus estimates expect the nationwide manufacturing sector PMI to continue to languish in the contractionary territory below 50.0. The skepticism isn’t surprising, given how muted this data set has been for most of the last year and also the unique headwinds created in January 2020: Boeing’s production halt will put a dent in the data from large parts of the commercial aircraft supply chain, and the data has been collected late enough in the month that we could see some early ripples of impact from the coronavirus outbreak. With gold prices markedly weaker this morning, it’s possible that a rough round of manufacturing PMI could drive more safety-seeking buyers into gold; but with the huge pressure being exerted on the commodities complex it’s hard to anticipate how much room gold will have to rally.
Wednesday, February 5 at 8:15am ET // ADP Payroll Employment (Jan)
[consensus exp.: +158k // prev.: +202k]
The reported number from ADP on monthly private payroll jobs added to the economy has come in outside of touching distance, to the upside and the down, of expectations in recent months so it feels tough to call with any confidence for January. That said, with jobless claims having trended lower in the month it seems more likely to be a beat than a miss to the downside.
More importantly, while there’s not a reliable directional correlation between ADP payrolls and the same month’s NFP number (a gain in one doesn’t promise a gain in the other, and vis versa,) the algo-heavy risk markets are always susceptible to a knee-jerk reaction like the one we saw pushing gold prices lower immediately following last month’s ADP data. So if you have some price risk on, it’s important to be aware of when the new report is hitting on Wednesday.
Wednesday, February 5 at 10am ET // ISM Non-Manufacturing PMI (Jan)
[consensus exp.: 55.1 // prev.: 54.9]
For going on ten months now, the services sector PMI has stuck within a pretty flat 2.0 range and managed to float above the 50.0 breakeven, though not high enough above to be convincing. Regional surveys for January were mixed, so the expectation to remain tight to 55.0 is reasonable. There will be some Dollar/risk sensitivity to this number like there always is; while I think an upside surprise would need to come in above 60.0 to materially boost risk appetite and put pressure on safe havens like gold, it may only take a print as low as 51.0 to drive more risk-averse trading. The manufacturing sector’s PMI performance on Monday could also heighten the attention on the service sector read.
Thursday, February 6 at 8:30am ET // Initial Jobless Claims
[consensus exp.: +215k // prev.: +216k]
Friday, February 7 at 8:30am ET // January Jobs Report
[Nonfarm Payrolls consensus exp.: +160k // prev.: +145k]
[Unemployment Rate consensus exp.: 3.5% // prev.: 3.5%]
We can reasonably assume that there’s nothing coming in this month’s Jobs Report that will materially affect the Fed’s view on current monetary policy or the outlook for 2020. In fact, NFP itself seems likely to be very similar to last month’s pace, given how reliably the trendline for Initial Jobless Claims returned to its low level in January. In an interesting quirk of labor economics, tight labor markets (like the one we presume we currently have) often see marked acceleration in January—long story short, it’s as a result of fewer lay-off in the month prior—so similar to Wednesday’s ADP there’s a slightly better chance of a beat vs. expectations rather than a disappointment.
The headline unemployment rate will remain at 3.5%. Maybe forever.
FedSpeak this Week
Now that we’re on the other side of January’s FOMC meeting, we’ll start seeing the docket populated with public comments from Fed officials but, as usual, in this first week it’s more of a slow trickle. There are a few items that are very unlikely to cover topics relevant to this week’s markets; namely an appearance by Federal Reserve Governor Lael Brainard on Wednesday afternoon. For the more pertinent engagements: we expect the committee members to carry the party line about confidence in current monetary policy, but I’ll be interested to see if anyone has dissenting opinions on how China’s coronavirus crisis—still the hot topic in markets—could materially affect the outlook.
Thursday, February 6: Dallas Fed President Robert Kaplan (FOMC voter) (9:15am ET); Federal Reserve Vice Chair Randal Quarles (FOMC voter) (7:15pm ET)
Friday, February 7: Release of Federal Reserve Board’s Monetary Policy Report to Congress
Global Economic Data to Watch
Now that Brexit is “officially” done (more on that in the coming months, I promise,) economic matters on the Continent will be taking a backseat this week as far as gold and other safe have assets are concerned. With analysts trying to evaluate the likelihood of a rally in European growth this year, there will be some interest in Euro Area PMI due on Wednesday, and update on German Industrial Production at the end of the week. Neither of these warrant preparation or positioning for metals traders, but could be valuable points of reference if we see any notable moves or volatility in gold pricing during European sessions.
And that’s how the week ahead of us looks, traders. As always, I wish you the very best of luck in your markets over the next five trading days. I’ll see you back here on Friday for our weekly market wrap.