Commodities Week Ahead: U.S. Jobs Numbers Next For Oil, Gold After Debt Deal

Yogi Berra, the U.S. baseball legend, had it right when he said: “It ain’t over till it’s over.”

And just like that, trepidation over the debt ceiling deal between President Joe Biden and his Republican rivals continues ahead of its ratification by Congress, prompting markets to look toward something else: Job numbers for May and their likely impact on the Federal Reserve’s June 14 rate decision.

Both oil and gold prices seesawed in Tuesday’s pre-New York session as traders mulled over the possibility of U.S. nonfarm payrolls for May again breaching economists’ estimates.

By 02:30 ET, the front-month contract in U.S. West Texas Intermediate, or WTI, crude hovered below $72.30 per barrel, down 0.6% from Friday’.

London-traded Brent crude, the global benchmark for oil, was down 0.8% at under $76.50.

Benchmark gold futures on New York’s Comex was down almost $12 an ounce, or 0.6%, to below $1,952.

Economists are forecasting U.S. non-farm payrolls to have grown by 180,000 in May. They predicted a similar payroll growth in May against the 253,000 reported by the Labor Department.

Should the department report another jobs growth number above 200,000, it could influence the Fed to hike rates again in June instead of pausing them.

From an economic perspective, stronger labor numbers are good for oil as more Americans moving about for work means higher fuel consumption. For gold, stronger economic numbers are usually a negative as less money will flow to safe havens.

But in an environment of Fed rate hikes, job numbers exceeding expectations typically bump up the dollar, weighing across the board on commodities priced in the U.S. currency.

In Tuesday’s session, the Dollar Index, which pits the greenback against six other major currencies led by the euro, hit a near-one-week high at 104.38. The index is due to close higher for May, for the first time in two months, after a U.S. banking crisis erupted in March.

Economist Justin Low said in a commentary that ran on the FXLive forum on Tuesday:

“The [jobs] data will be one to validate or invalidate the prevailing market sentiment, and that is currently one where traders are walking back on dovish Fed expectations since the banking crisis.”

“On 11 May, traders were still expecting three rate cuts by year-end. Fast forward to today, and the implied rate is still sitting above 5% for December pricing. The higher-for-longer [rate hike] narrative has certainly won out and, as warned before, that is one that the dollar could have - and currently is - benefit[ting] from.”

The Fed has raised rates by 10 times since the end of the coronavirus pandemic in March 2022, adding a total of 500 basis points, or 5%, that has brought rates to a peak of 525 basis points, or 5.25%.

Federal Reserve Governor Chris Waller suggested last week that the central bank may skip a rate increase on June 14 but still lean towards a July hike depending on inflation data.

St. Louis Fed President James Bullard, one of the more aggressive advocates for tighter monetary policy, has suggested at least two more rate hikes this year, totaling 50 basis points, that would bring rates to a peak of 5.75%.

The remarks by Waller and Bullard were reinforced by data on Friday showing that the Fed’s favorite gauge for U.S. inflation grew more than expected in April, indicating the central bank will raise interest rates again in June and July versus expectations for a pause.

All key metrics in the so-called Personal Consumption Expenditures, or PCE, Index rose for last month against forecast levels as the Fed keenly looked for signs that would compel a hold on its higher-for-longer monetary policy that has already seen 10 rate hikes over 15 months.

For the year to April, the PCE Index expanded at 4.4% versus forecasts for 3.9% and previous growth of 4.2%. For the month of April itself, it jumped 0.4%, as expected and versus a prior expansion of 0.1%.

“Core” PCE, which strips out volatile food and energy prices, gained 4.7% on an annualized basis versus both the projected and previous rate of 4.6%. On a monthly basis, it rose 0.4% against the forecast and prior rate of 0.3%.

Adam Button, another economist on the ForexLive forum, said:

“Inflation is a problem and the consumer remains red hot. The Fed is going to hike again and now the odds are 58-42% for June and July is 100% with a slight chance of another hike.”

“At some point the Fed will have to pause and evaluate but we're lapping some very high energy numbers now and it's not enough to get inflation to a 3-handle. At minimum, the Fed needs to start seeing some monthly numbers at +0.3% or lower.”

The debt deal forged by Biden and his rival McCarthy caps federal spending and forces more poor people to work for food aid, concessions that Democrats aligned to the president's hate.

But it also preserves much of Biden's Inflation Reduction Act and punts the next debt ceiling showdown into 2025, which Republicans hate.

All said, the deal still faces a difficult path to pass through the narrowly divided Congress before the government runs out of money to pay its debts, which the Treasury warned Friday will happen by June 5.

The long standoff on raising the debt ceiling has spooked financial markets, weighing on equities and forcing the United States to pay record-high interest rates in some bond sales, but for the most part, investors had been expecting Washington to reach a deal, meaning a sustained rally in stock markets may be unlikely.

Some analysts said a deal on the debt ceiling getting done may give more reason for the Fed to feel confident about raising rates again.

On the rate hike front, markets are now pricing in a roughly 64% chance that the Fed raises rates by another 25 basis points at its June 14 meeting, according to Investing.com’s Fed rate monitor tool.

Investors will be watching appearances from Fed officials during the week with Richmond Fed President Thomas Barkin and Philadelphia Fed President Patrick Harker, along with board member Philip Jefferson scheduled to speak.

On the global front, China is to release official PMI data on Wednesday, followed a day later by the private sector Caixin manufacturing PMI. The contraction in the manufacturing sector is expected to moderate slightly, while the rate of expansion in the stronger service sector is expected to slow.

This would chime with recent economic data, which has pointed to a loss of momentum in the world’s number two economy amid weakening demand both at home and in the country’s major export markets.

Beijing has set a modest growth target of around 5% for this year. Earlier this month, Premier Li Qiang vowed more targeted measures to expand domestic demand and stabilize external demand in an effort to promote a sustained economic rebound.

The Eurozone is to release flash consumer price inflation data for May on Thursday which is expected to underline that the European Central Bank still has a long way to go in its battle to curb price pressures.

Headline inflation is currently running at 7% on a year-over-year basis, while underlying annual inflation is currently 5.4%, both well above the ECB’s 2% target.

At its most recent meeting earlier this month, the ECB reiterated that it was very much in rate-hiking mode, saying "more ground" needs to be covered to tame inflation.

Data last Thursday showed that Germany, the bloc’s largest economy, entered a recession in the first quarter as high inflation hit consumer spending.

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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.