Gold Remains Firm as Fed May Have Cried 'Hawk' One Too Many Times

Gold is maintaining the gains realized on Friday, following the very disappointing May jobs report. The dollar remains under pressure with perhaps only the weaker pound — as a result of heightened Brexit expectations — offering an underpinning.

The yellow metal gained more than $35 on Friday after U.S. nonfarm payrolls came in well below expectations at just +38k. The market had been expecting +160k and what was delivered was the smallest monthly jobs gain in 6-years. April and March saw negative revisions to NFP as well. While the jobless rate fell to 4.7%, it was because the number of Americans not in the labor force surged a whopping 664k to a record 94.7 million.

As we noted in Friday's DMR, the trend in NFP is decidedly negative since late last year. This morning, the latest read on the Fed's Labor Market Conditions Index (LMCI) confirms the deteriorating state of the jobs market. The LMCI fell to -4.8 in May, from a negatively revised -3.4 in April (was -0.9). It was the seventh consecutive monthly decline and lowest read in seven-years.
The LMCI is a composite of 19 different labor market indicators, created by the Fed itself and unveiled at the their Jackson Hole symposium in 2014. At the time, Fed chair Yellen called it a "convenient way to summarize the information contained in a large number of indicators." In a MarketWatch article from 2014 discussing the new indicator, it was noted that from 1980 to May 2014, the Fed found that the average monthly reading during an economic expansion was 4.

The LMCI hasn't seen a print above 4 since January . . . of 2015! Nonetheless, the first paragraph every FOMC statement going back to that time — and beyond — has included some reference to improving labor market conditions (April 2015 was more neutral). The most recent statement said the following:
[stextbox id="gold"]Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed. — FOMC Statement, April 27, 2016[/stextbox] It's becoming pretty evident that that is in fact not the case. I find myself wondering if the June FOMC statement will finally mark the end of the 'improving labor market conditions’ charade.

Janet Yellen begins speaking momentarily on the economic outlook and monetary policy at the World Affairs Council of Philadelphia. It will be interesting to see whether she sees the May jobs weakness as "transitory," or whether she acknowledges the broader weakness in the labor market and the dovish implications for policy.

If it is the latter, in light of the hawkish full court press by Yellen's minion in the weeks between the release of the April FOMC minutes and the jobs report, she arguably has a considerable credibility issue on her hands. The Fed may have cried 'hawk' one too many times . . .