Investors' Expectations of July Rate Hike Rise as Labor Market Shows Strength

Investors are increasingly anticipating a July rate hike by the Federal Reserve, buoyed by the release of a strong ADP private sector jobs report. This report is considered a precursor to the government's nonfarm payroll jobs report by the Bureau of Labor Statistics, which is scheduled for release on Friday. While the ADP report excludes government jobs, it still provides valuable insights into the overall strength or weakness of the upcoming report.

The June ADP jobs estimate surpassed expectations, revealing the largest increase in private sector payrolls since July 2022. According to ADP, the private sector added 497,000 jobs last month, more than double the forecast of economists polled by the Wall Street Journal, who had anticipated an additional 220,000 jobs. The service sector saw the most significant gain in new jobs, adding 373,000, while goods-producing employment increased by 124,000.

The report also indicated that wages grew by approximately 6.4% compared to the previous year, slightly down from the 6.6% wage gains observed in May.

Economists surveyed by the Wall Street Journal predict that the Labor Department's report will show a gain of 240,000 jobs added in June, a decrease from the exceptionally strong numbers in May, which stood at 339,000. Additionally, unemployment is expected to decrease from 3.7% in May to 3.6% last month.

The robust labor market and increasing wages have presented a challenge for the Federal Reserve. The strong employment figures suggest that the economy is robust enough to withstand additional rate hikes. The CME's FedWatch tool currently indicates a 91.8% probability of a rate increase this month.

Consequently, there has been a rise in yields on U.S. 10-year Treasuries and a significant increase in yields on two-year U.S. Treasury Notes, reaching their highest level since June 2007.

The combination of rising yields and higher rates has created adverse conditions for gold pricing. As of 5:55 PM EDT, gold futures based on the most active August contract have declined by $10.20, settling at $1916.90. Although the dollar experienced a slight weakening in trading today, its decline helped mitigate a more substantial decline in gold prices that would have occurred if the dollar had strengthened.

Interview table of content

0:00 - How many more rate hikes?

6:43 - Gold price action

8:00 - Dollar strength

11:00 - Inflation and gold

17:20 - Fixed income

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This interview was recorded on Wednesday, July 5, 2023. David Lin of the David Lin Report and myself discuss how many interest rate hikes the Federal Reserve is likely to enact for the remainder of 2023. This will lead to a discussion about how theses rate hikes could impact the financial market.

Please enjoy today's content and the interview,

Wishing you as always good trading,