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  • Spot silver only very briefly dipped below $25.00 in wake of a strong US NFP report.
  • But the precious metal  still trades lower on the day as precious metal sentiment remains ropey.

Spot silver prices (XAG/USD) are currently trading in the low $25.00s, having been sent below the $26.00 level on Thursday in wake of comments from the Chairman of the Federal Reserve Jerome Powell. As a recap, Powell was dovish on the economy and the outlook for interest rates but did not indicate anything about Fed plans to tweak/expand its QE programme in order to address rising US bond yields, which appears to have been the source of the market’s disappointment.

Meanwhile, a much stronger than anticipated US Labour Market report for the month of February sent spot prices briefly below the $25.00 level, but appear now to have dealt much by way of lasting damage to spot silver prices, which are currently back trading in similar ranges as before the data was released.

The lack of lasting downside probably owes itself to the fact that US government bond yields, which spiked in an immediate reaction to the strong NFP data, have fallen back to pre-release levels; for reference, the US 10-year, which shot from around 1.56% to as high as 1.62% has now completely reversed this move and is trading around the 1.55% mark again. In fact, real yields have actually dropped slightly on the day; 10-year TIPS yields are close to lows of the day and back under the -0.66% mark. Note that precious metals tend to have a negative correlation to real yields.

On the day, however, silver is still down about 0.75% or over 20 cents. Precious metal sentiment remains ropey as the economic outlook strengthens (bolstering the case for bond yields to move even higher) and as banks revise down their previously lofty precious metal forecasts.

US Labour Market Data Review

The US economy added 379K jobs in February, well above expectations for the economy to have added 182K. But the labour market performed better than the headline NFP number suggests; the private service sector 513K jobs as the easing of economic restrictions allowed hospitality, retail and leisure sector-related jobs to return. Meanwhile, the manufacturing sector added 21K jobs, but construction saw 61K in job losses as a result of bad weather. Moreover, local and state government employment dropped by 69K, a trend most desks expect not to continue, particularly with further fiscal stimulus incoming.

Had February not seen freak weather conditions in much of the country and had government jobs not surprisingly fallen, markets might easily have been looking at a +500K job gain. Assuming that conditions in the US economy continue to improve in March; i.e. lockdown restrictions continue to ease as the prevalence of Covid-19 drops and the vaccine rollout continues, further large gains should be expected to continue. These employment gains might accelerate from April as the economic tailwind from US President Joe Biden’s $1.9T stimulus bills kicks in (assuming it gets passed into law by mid-March and stimulus cheques are sent out within a few weeks).

The US unemployment rate dropped to 6.2% unexpectedly (consensus forecasts were for the unemployment rate to remain unchanged at 6.3%), as the gain in employment outpaced the rate at which workers returned to the workforce. The participation rate remained unchanged at 61.4% (but actually was down about 50K). Total employment levels are still about 9.5M below their pre-Covid-19 levels in the US. Even if the rate of job gains does pick up to about half a million new jobs per month (which would probably be an over-optimistic forecast), that implies it is still going to take into 2023 before the US economy reaches full employment.

That means the Fed will (inflation permitting) continue to sit on its hands with regards to interest rates. Indeed, the Fed may even be targeting an unemployment rate of below pre-Covid-19 levels given recent rhetoric on how it seeks to create “inclusive” full-employment; that likely means that, say, if White unemployment is at 2.5% but minority unemployment remains at say 6% (implying a national unemployment rate of say 3.5%), this would still not constitute full employment for the Fed. In other words, they are taking a more dovish interpretation of their full-employment mandate than they ever have before.