The gold market is seeing some selling on Friday as the non-farm payrolls data surprised to the upside. According to the report, the U.S. added some 528,000 jobs in July. Consensus estimates were calling for a rise of 260,000 jobs. The much better-than-expected jobs data may force the Fed to hold its current course and continue raising rates aggressively.

The Fed May Not Pivot Now

The jobs data immediately sent treasury yields and the dollar higher, pushing gold lower in the process. The Fed’s possible dovish pivot may now not happen. If further data is released in the weeks ahead that points to inflation remaining high or economic strength, the Fed will possibly see no other choice than to hike rates again aggressively at their September meeting.

                                                                                                                                         Source: cnbc.com 

Inflationary data has remained persistent in recent weeks despite previous rate hikes by the Fed. What is seemingly becoming increasingly likely is a period of stagflation. Although today’s jobs data was a big plus, there have been other areas of the economy that have shown weakness in recent weeks.

Stagflation

The combination of inflationary pressures with economic weakness could point to stagflation setting in. Under this scenario, the economy loses strength and growth comes to a halt as inflation remains abnormally high. Stagflation can be a short-lived affair, but more than likely could remain in place for several months or years.

An extended period of stagflation could damage not only the economy and markets but investors as well. Incomes remaining stagnant as prices stay elevated or rise even further is not a recipe for healthy markets. As the squeeze continues, investors will have no choice but to cut back on their investing.

Cutbacks by investors can pressure stock markets and keep risk assets depressed. As the problem becomes increasingly prolonged, consumers can also cut spending in other areas that exacerbate the economic stress. A cycle is built over time that becomes very challenging to break free from.

U.S./Chinese Tensions

U.S./Chinese tensions have not yet eased. China is conducting further military exercises around Taiwan following this week’s visit to the island from U.S. House Speaker Nancy Pelosi. The escalation is worrisome as there had already been talk of a possible Chinese invasion of Taiwan before the Pelosi visit.

Like the Russian invasion of Ukraine, a Chinese military action against Taiwan could be problematic for the global economy. Such a scenario could potentially put Asia on lockdown, cutting off key supply chains in the process. This may only add to global inflationary woes and could keep prices for goods in the area highly elevated for some time.

Today’s jobs data may make it difficult for those arguing the U.S. is already in a recession. Although growth may have slowed, the jobs market still appears to be rock solid. If the Fed has less reason to be concerned about recession when it next meets, it may look to keep raising rates aggressively to get inflation under control.

Can The Fed Do Enough?

Whether the Fed is able to do enough to get inflation under control is another matter. Barring a run in rates to Volcker-era 20% levels, the Fed may lack the ammunition necessary to get prices back down to earth. Should inflation become entrenched, the Fed may no longer have the power to fulfill its dual mandate as changes in policy could become meaningless.

The gold market remains in no man’s land. The bears are still targeting a close below the $1700 level. The bulls need to produce a close above the $1800 area. Despite today’s declines, the bulls are still within striking distance of testing the $1800 level. A close above could attract a fresh wave of buyers that could potentially drive prices quite a bit higher, possibly even to the $1900 level before needing a break.

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