Hidden employment risks, inflation repeatedly drags gold prices

Huitong Financial, August 13 —— US inflation and employment data diverge, Fed hawk-dove split intensifies, gold trapped in key wide-range fluctuation pattern in the short term

The overall US July PPI data came in below market expectations. The cooling of energy and food prices led to a temporary easing of producer-end inflation. Coupled with previous CPI figures indicating a slowdown, the short-term market’s expectation of inflation retreat was supported, providing a data-based reason for the Fed to pause rate hikes.

However, the logic for continued inflation decline has notable flaws. Internal PPI sub-indicators are diverging: prices related to medical services have surged, directly heightening concerns about core PCE inflation, and the issue of price stickiness has not been fully resolved.

Meanwhile, the ongoing tensions in the Middle East, with mounting disruptions in the Strait of Hormuz, are raising the risk of higher crude oil prices. This rebound in supply chain costs could gradually pass through to end-consumer goods over the coming months.

There Is a Notable Split Between Two Fed Officials on the Outlook for Inflation

Hawkish official Harker believes that two positive inflation reports are not enough to prove that prices will continue to cool. He thinks the economy is still overheating with broad inflation issues, and the Fed should immediately raise rates to contain prices.

Barkin maintains a neutral stance. He acknowledges that easing wage pressures and fading tariff and oil price shocks may ease inflation, but also warns that there is a possibility of long-term price stickiness. He states that achieving the 2% inflation target still leaves open the possibility of further rate hikes.

In addition, two major long-term drivers of inflation cannot be ignored.

Barkin noted that the current high federal debt in the US will continue to generate inflationary pressures, which will be a long-term challenge for the Fed;

Harker added that while companies have adapted to tariff and oil price fluctuations, robust consumer demand persists, with consumers actively using credit to support spending, providing continued upward pressure on inflation.

Labor Market: Overall Data Remains Resilient, but Internally Trapped in a “No Hiring, No Firing” Structural Dilemma

The latest initial jobless claims rose to 209,000, slightly above market expectations. However, the four-week moving average remains at historic lows, so the risk of mass layoffs in the short term is limited, and the unemployment rate remains stable. From a macro perspective, there is no broad signal of labor market deterioration.

However, the rosy aggregate numbers mask deeper contradictions in the job market. After the labor shortages during the pandemic, companies are reluctant to lay off existing workers, yet their willingness to create new jobs remains weak, creating a unique “no hiring, no firing” market structure.

Monthly nonfarm payroll growth has shrunk sharply, far below levels seen during previous periods of economic expansion, making job-hunting clearly more difficult for job seekers and re-entrants after unemployment.

The two Fed officials also have differing perspectives on the employment market.

Harker sees the unemployment rate as a core measure of employment, recognizing the overall stability of the labor market, but reminds that employment data itself can be noisy, and economic heat should not be judged solely on labor market resilience.

Barkin noted that the proliferation of artificial intelligence gives companies an incentive to reduce their workforce, but as corporate profits remain solid, the pressure for mass layoffs is low. Stable employment continues to support consumer spending, and with the added wealth effect from rising real estate and stock prices, there is ample consumer spending momentum.

The current employment situation forms a mutual constraint with monetary policy. Marginal weakening in employment would reduce the Fed’s drive for aggressive rate hikes, but resilient consumer spending and corporate investment limit the implementation of easing policy. Business investment remains quite resilient against high interest rates and market uncertainty, so overheating risks in the economy remain the focus for hawkish officials.

Fed Policy Divergence: Hawks Vigorously Call for Rate Hikes, Neutral Officials Remain Cautious Pending More Data

Hawkish official Harker’s stance is clear and firm, insisting on an immediate rate hike. He believes the current policy is not tight enough, rapid economic growth will keep pushing prices higher, and that even if rate hikes cause economic pain, overheating must be contained.

At the same time, he warns of several financial stability risks: large amounts of leveraged capital flowing into Treasuries, expansion of private credit, and the bubble in AI industries—all of which require ongoing Fed monitoring and oversight.

Barkin maintains a wait-and-see approach and does not explicitly support rate hikes. He revealed that many Fed officials believe current rate levels are already sufficient to suppress inflation. Whether rate hikes are needed to achieve the 2% inflation target remains undecided and requires further assessment after new rounds of inflation and employment data.

The market’s logic is clear: weak PPI data and structurally cooling labor market support bets on the Fed pausing rate hikes;

However, persistent core inflation, potential risks from Middle East tensions pushing up oil prices, and continued hawkish statements from Harker make the policy outlook for the September FOMC highly uncertain, with market pricing for rate hike odds fluctuating repeatedly.

Market Reflections: Multiple Contradictions Intertwined, Gold Prices Maintain Wide-Range Fluctuations

With inflation and employment data diverging and Fed officials deeply divided, market bulls and bears are in fierce tug-of-war.

On one hand, July PPI cooled overall and the domestic labor market is weakening, suppressing expectations for US Treasury real yields and dollar strength, thereby enhancing gold’s allocation value as a non-interest-bearing asset. Coupled with safe-haven buying due to the Middle East situation, this builds bullish support for gold prices. While Harker’s tightening stance is firm, as he is one of the three major Fed hawks, the market is not surprised by his hawkish signals.

On the other hand, persistent inflation in core PPI components, Harker’s vigorous calls for rate hikes, and oil price rebounds that stoke inflation rebound expectations keep the market pricing in Fed rate hike possibilities, raising the opportunity cost of holding gold and restraining the upside for gold prices.

In the short term, gold prices are likely to continue wide fluctuations around September’s rate hike expectations. Upcoming key catalysts for breaking the current range will be core PCE price data and new nonfarm payroll numbers.


(Spot Gold Daily Chart, Source: Yihuichong)

Spot gold is currently quoted at $4,372/ounce.