Gold Ignored the Best Jobs Data in Months. What Is It Trying to Say?

A blowout jobs report and scorching service sector data flattered Fed rate hike bets but stocks idled, gold refused to fall, and the US dollar would not rally. What now?

• US employers added 162,000 jobs against forecasts near 56,000, with revisions adding another 55,000 to prior months
• Gold has now refused to sell off twice, first as real yields climbed in July and again as the data made the hawkish case
• Inflation expectations woke up when the long end of the yield curve began to flatten, not when crude oil rallied

Markets are refusing to cooperate. The bellwether S&P 500 remains pinned in the range that has held it since the start of August, while the tech-heavy Nasdaq 100 hugs the 29,000 area. Long-dated Treasury bonds are once again sitting on the floor they have bounced from since late July. Gold and the US dollar are digesting in familiar territory.

This standstill comes despite blistering back-to-back US economic data. Official BLS statistics showed the economy added 162,000 jobs in August, sailing past forecasts calling for a rise of 56,000, while data revisions piled another 55,000 onto the prior two months. The unemployment rate held steady for the right reasons, with nothing troubling in the participation figures. That followed a service-sector purchasing managers index (PMI) survey from the Institute for Supply Management (ISM) showing the fastest growth since February. If the Federal Reserve wanted justification to raise interest rates, here was a big dose of it.

Hot US economic data fails to inspire gold, US dollar

Gold has made something of trend of defying conventional wisdom recently. In July it held its ground while real interest rates pushed higher, which should be punishing for an asset that yields nothing. Now it has held again while the economic evidence screams that hawkishness is warranted. The dollar has run the same pattern in reverse, refusing to rally through July when improving yields argued it should, and refusing again now.

The easy explanation might have been that markets have stopped caring about inflation risk, but that is demonstrably untrue. Breakeven inflation rates spent July and much of August pinned at the lows for the year despite rebounding oil prices. They have stirred back to life, with five- and ten-year rates hitting the highest in three months.

A level markets now defend on their own

At the same time, the 30-year Treasury bond has been conspicuously pinned at a critical price floor. It was established in late July when the Treasury Department joined Japanese authorities in supporting the yen, structured so Tokyo could act without selling dollars or dollar-denominated assets. The message was that Washington would not tolerate heavy selling of US securities at the long end, and that 30-year yields had gone about as high as officials cared to see.

On August 18 markets probed the level again and Treasury Secretary Scott Bessent responded within a day, doubling bond buyback operations from $2 to $4 billion. Speaking in a follow-on interview with CNBC, Bessent said the move was a signal to the markets about where yields ought to be. Last week brought a third test, accompanied by another spike in the yen. This time no authority claimed it, and the Bank of Japan published flow-of-funds data suggesting it had not acted. The reaction function may now be organic: traders simply assume the level will be defended and step away from it themselves.

The curve explains the puzzle

Looking at the opposite ends of the yield curve separately makes the picture clearer. At the front end, the spread between three-month and two-year rates has steepened, as it should given hawkish talk from Fed Chair Kevin Warsh and the tightening now written into forecasts. At the long end, the gap between 10-year and 30-year yields has flattened markedly ever since Bessent signaled his discomfort with rising long-term rates.

Tellingly, those breakeven inflation expectations did not stir when crude oil began climbing again in early July after close to a month of losses. They came alive when the long end started flattening. At the same time, the iShares TIPS Bond ETF (TIP) stopped falling after a four-month selloff, implying that real interest rates may have peaked. Gold accelerated higher and the dollar tumbled from there, even as the front end started to steepen.

Put it all together, and it begins to look like the markets are concerned with something other than the next quarter-point move from Fed officials. Rather, they may be pricing the longer-run inflation that follows from holding down the long end of the curve. Whatever near term tightening may be coming near term, official yield suppression at the long end seems to have convinced traders that the collective policy mix will err on the looser side.

That explains why blockbuster data changed so little. Futures still put the odds of one hike by year-end between 80% and 90% and a second at 40% to 50%, barely cooler than after Warsh’s hawkish performance at the Jackson Hole symposium. There was seemingly room to price in a still more hawkish vision, but traders pointedly declined. US producer prices (PPI) data on Thursday and consumer inflation statistics (CPI) on Friday will mark the next key inflection points. The question may no longer be whether that data justifies rate hikes, but whether anyone is still trading the front end story at all.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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