US September Nonfarm Payrolls Preview: Analyzing gold's reaction to NFP surprises

• Nonfarm Payrolls in US is forecast to increase by nearly 500,000 in September.
• Gold is likely to react more significantly to a disappointing jobs report than an upbeat one.
• Gold's movement has no apparent connection with NFP deviation four hours after the release.  

The US Bureau of Labor Statistics (BLS) will release the September jobs report on Friday, October 8. Following a disappointing increase of 235,000 in August, investors expect Nonfarm Payrolls to rebound and rise by 488,000 in September. 

The data published by the Automatic Data Processing (ADP) Research Institute revealed on Wednesday that employment in the private sector rose by 568,000 in September, surpassing the market expectation of 428,000. Nevertheless, during the press conference following the September policy decision, FOMC Chairman Jerome Powell noted that they don't need to see strong jobs report to start reducing asset purchases. "Many on the committee think employment bar for tapering has already been met," Powell added and these comments could cause the market reaction to remain muted. 

In order to understand how impactful the US jobs report has been on gold’s valuation, we analyzed the XAU/USD’s pair reaction to the previous 15 NFP prints. However, we omitted the NFP data for March, which was published on the first Friday of April, due to lack of volatility amid Easter Friday.

Methodology

The FXStreet Economic Calendar assigns a deviation point to each macroeconomic data release to show how big the divergence was between the actual print and the market consensus. For instance, the August NFP data missed the market expectation of 750,000 by a wide margin and the deviation was -1.49. On the other hand, February’s NFP print of 536,000 against the market expectation of 182,000 was a positive surprise with the deviation posting 1.76 for that particular release. A better-than-expected NFP print is seen as a USD-positive development and vice versa.

Next, we plotted gold’s reaction 15 minutes, one hour and four hours after the release to see if the general market view held. 

Finally, we calculated the correlation coefficient (r) to figure out at which time frame gold had the strongest correlation with an NFP surprise. When r approaches -1, it suggests there is a significant negative correlation, while a significant positive correlation is identified when r moves toward 1. Since gold is defined as XAU/USD, an upbeat NFP reading should cause it to edge lower and point to a negative correlation.

Results

There were eight negative and six positive NFP surprises in the previous 14 releases, excluding data for March 2021. On average, the deviation was -0.88 on disappointing prints and 0.47 on strong figures. 15 minutes after the release, gold moved up by $2.75 on average if the NFP reading fell short of market consensus. On the flip side, gold gained $0.44 on average on positive surprises. This finding suggests that investors’ immediate reaction is likely to be more significant to a disappointing print.

However, the correlation coefficients we calculated for the different time frames mentioned above don’t even come close to being significant. The strongest negative correlation is seen 15 minutes after the releases with the r standing at -0.38. One hour after the release, the correlation weakens with the r rising to -0.25 and there is virtually no correlation to speak of four hours after the release with the r approaching 0.

Several factors could be coming into play to weaken gold’s correlation with NFP surprises. Several hours after the NFP release on Friday, investors could look to book their profits toward the London fix, causing gold to reverse its direction after the initial reaction. Additionally, US Treasury bond yields’ movements have been impacting gold’s action lately and a decline in the benchmark 10-year T-bond yield on an upbeat jobs report could make it difficult for the USD to gather strength against its rivals, limiting XAU/USD’s downside.