Nonfarm Payrolls Quick Analysis: American salaries march forward, limiting USD losses and Gold gains

• The US economy has gained 209,000 jobs in June, less than expected.
• Wage growth remains healthy at 0.4% MoM, above 0.3% expected. 
• Elevated expectations ahead of the event imply falls for the US Dollar, gains for Gold and stocks.

The US has gained 209,000 jobs, within expectations – but the US Dollar loses ground. Is it all a game of expectations? Not in this case, as the details matter.

ADP, America's largest payrolls software provider, shocked markets on Thursday by reporting an increase of 497,000 private sector jobs in June. Investors hastingly jumped from dismissing the report – which is poorly correlated with the official report – to leaping to adjust positions. The US Dollar jumped and stocks dropped, with the S&P 500 having the worst day in six weeks.

It also shaped expectations leading to the Nonfarm Payrolls report. Real estimates stood at somewhere above 300,000 – perhaps even 350,000 rather than the 225,000 recorded beforehand. That is why the Greenback has room to fall, and stocks to recover. Yields on US 10-year yields reached the dizzying heights of 4%, and returns on 2-year bonds hovered around 5%. Markets went too far.

The expectations game is also related to the upcoming Federal Reserve (Fed) decision on July 26. A 25 bps rate hike was mostly priced in. June's NFP all but confirms an increase in borrowing costs. Only a weak inflation report next week could change the minds of Fed Chair Jerome Powell and his colleagues. That is highly unlikely. 

Expectations are not everything – looking under the hood, but there is a reason to remain cautious. Why? Wages – Average Hourly Earnings are up 0.4% MoM, above 0.3% expected. In absolute terms, this is not a massive pay hike, but the refusal of salaries to decline keeps pressure on the Fed to raise rates and keep them high. This is the stickiest part of inflation. 

How the US Dollar, stocks and Gold are set to move after the Nonfarm Payrolls

What is next? I expect the US Dollar to remain on the back foot, but to hold some of its ground. The mix of weak job growth and wages marching forward shifts the focus to next week's Consumer Price Index (CPI) report. 

For stocks, the NFP is far from the Goldilocks scenario – companies would like lower labor costs and many employees able to buy its products. The report shows the opposite: high costs and not-so-amazing job growth. I think shares will remain mixed. 

The story is similar for Gold – some gains, but no bullish turnaround – the trend remains down, especially with US 10-year yields holding above 4%. 

All in all, the American economy looks stable, not too hot nor too cold – leaving the next big market moves for the CPI data.