Discussion on Nonfarm Payrolls, the US Dollar, and Gold

Last Friday night's nonfarm payrolls report shook the market. In July, nonfarm payrolls in the US decreased by 23,000, with an unemployment rate of 4.1%. This is a very weak set of data, but also a controversial one. There were many discussions overseas over the weekend, and the author believes one point is worth noting: the US fiscal policy may be entering a tightening cycle.

First, let me pose a question: Do you believe that the sharp decline in government employment this month is a one-off phenomenon? Obviously not. Since Trump took office, the reduction in government employees has been an ongoing trend, which relates to government budget contraction. It's just that the reduction in government jobs this month (-53,000) was so significant that it attracted more attention.

In recent years, there has been a recurring phenomenon in US fiscal management: each third quarter tends to be a "fiscal gap period." The first three fiscal quarters see heavy spending (October to the following June), while in the last quarter (July to September every year), there is a periodic "fiscal gap." According to this year's budget data, 88% of the annual US fiscal deficit has already been used up by the end of the first three quarters, demonstrating significant frontloading of spending. Because of these temporary fiscal gaps, US economic data and government employment often weaken in Q3, which is an interesting phenomenon under the MMT era.

Looking further ahead, midterm elections will inevitably come into focus. How will the midterms affect US economic policy and the US dollar exchange rate? The author believes one thing is for certain: US fiscal policy is heading into a passive tightening cycle. Trump’s approval rating has sunk to a record low (39%), and it is now very likely that the Republican Party will face headwinds in the midterms. Losing the House or a Democratic sweep of both chambers would make fiscal expansion in 2027–2028 extremely difficult... Therefore, marked by the midterms, US fiscal policy is very likely to enter a passive tightening phase.

Viewed in the larger context, if the US fiscal position is indeed entering a tightening cycle, what does this mean for major asset classes? In my opinion, there are a few implications:

1. Passive fiscal tightening is unfavorable for the US dollar exchange rate. In our previous article "Rethinking the US Dollar Exchange Rate Framework," we noted two major long-term drivers for the dollar: "technology + fiscal." Technology serves as an upward force, while fiscal acts as a downward force. As these forces evolve at the margin, it’s possible the year's peak in the DXY was already seen midyear.

2. Gold is moving from a short-term to a long-term logic. In the current macroeconomic context, as US fiscal policy enters a passive tightening cycle, this will certainly be bullish for gold. Long-term distrust in the US dollar will resurface in the market, and the acceleration of central bank gold purchases is a typical indicator—recently, countries like China and South Korea have again increased official gold purchases, and investment flows into the gold market are once more on the rise.

WGC data shows that the current global gold market has an average daily trading volume of $370 billion. After eliminating the impact of gold prices, the transaction volume has roughly returned to the level at the beginning of 2025. Thus, this round of gold market deleveraging should be drawing to a close. Going forward, the main focus will be on whether we see a repeat of last year's "weak dollar + strong gold" cycle. If this happens, the potential for the second half of the year could be higher than anticipated.

To summarize today's sharing:

1. Last Friday night’s nonfarm payrolls report shook the whole market. Taking a broader view, the author believes that one point deserves attention: the US fiscal position may be entering a tightening cycle.

2. In the short term, because US fiscal expenditures have been significantly frontloaded, Q3 has become a "fiscal gap period." In the medium term, Trump's approval rating has hit a record low, and it is likely that Republicans will be disadvantaged in the midterms. With the midterm elections as a turning point, US fiscal policy is likely to enter a passive tightening cycle.

3. For major asset classes, passive fiscal tightening in the US is negative for the dollar exchange rate. The full-year high of the US Dollar Index (101.6) may have already occurred in the middle of the year. Gold is shifting from a short-term to a long-term logic. The focus ahead will be on whether a repeat of last year’s "weak dollar + strong gold" self-reinforcing cycle occurs. If so, the second half of the year's market potential can be further upgraded.