Major Commodities Gain Ahead of the NFP

The overall context is a weaker picture for the American economy: no indication of recession yet but a clear slowdown compared to late 2023. This article summarizes recent news and data affecting major markets and looks briefly at the charts of gold (XAUUSD) and American light oil (USOIL).

ADP’s job report for May showed a gain of 152,000 workers against around 175,000 expected, which could suggest that Friday’s NFP might also be weaker than the consensus. The general trend of unemployment is also upward:

Based on comments from Jerome Powell and other senior members of the Fed since last year, a sustained slowdown in the job market is needed before the Fed seriously considers cutting rates. That’s not clearly visible yet, but last month’s NFP broke the long trend of higher than expected releases. It seems less certain that this month’s data will be better than expected. Reacting to generally weaker data from the USA in recent weeks, participants seem to be more confident pricing in a cut by the Fed in September:

The probability of at least one cut by September is up significantly since last week, reaching about 68% at the time of writing, a fairly clear majority. With the NFP and inflation coming up in the next few days of trading, this could change but it’d be unlikely to see an immediate shift towards a certain hold in September unless both the NFP and inflation are significantly higher than expected.

The Fed’s concern with cutting rates is mainly that inflation still seems to be too high to start a cycle of loosening while there are no obvious signals of recession. Headline inflation has stuck above 3%:

While April was the first time in more than a year that American inflation met the consensus rather than exceeding it, the rate remains significantly above the old target of 2%. That’s despite restrictive monetary policy having persisted for a long time now. Oil’s recent drop might push the rate down slightly but a sustained move below 3% before the end of the year seems unlikely.

The primary narrative of ‘higher for longer’ by the Fed seems to be weakening, which is generally positive for stock markets, most commodities and cryptocurrencies but negative for the US dollar. Monetary policy in the USA will probably continue to be at least moderately restrictive into next summer. Meanwhile some analysts and traders continue to predict a significant recession around the corner. Based on the evidence, that seems unlikely now, but there’s likely to be greater focus on GDP data in the next few months.

Gold, Daily

After a couple of tests of $2,320, gold’s upward momentum has resumed to some degree. The strong resistance of the latest high around $2,450 is quite far away, so there’s some potential for more gains depending on the actual data for the NFP. A clear break above $2,450 might be challenging but could be achieved if upcoming releases are negative for the dollar. The obvious stretch target in the longer term remains the 161.8% weekly Fibonacci extension around $2,575, reaching there would take some time even if there’s a quick break above the near-term resistance.

American Light Oil, Daily

The situation for oil is quite different in most respects, the main one being the overall downtrend. This accelerated earlier this week as OPEC+ announced that some voluntary cuts would end in October while other compulsory ones would continue into next year: the net result is more daily barrels coming to markets from around the middle of December.

That’s why the bounce on 5 June seems to be primarily technical. It’s generally rare for oil to move more than 4-5 consecutive days in the same direction unless there’s a really strong fundamental driver for that, so some degree of bounce here was expected. The price remains oversold based on the slow stochastic. In the short-term, the price is likely to attempt $75 sometime this week while $76 might flip to be a resistance. Another sharp move down immediately is unfavourable unless there’s a very surprising NFP.