The U.S. economy shed 23,000 jobs in July. The forecasts were for a gain of 80,000. Some workers appeared despondent while investors were ebullient as the weaker data signaled less reason for the Fed to hike interest rates.

 

Employment figures for May and June were also revised lower, with a combined 103,000 job losses more than previously reported. Readers who have read my two-part columns on government data have been forewarned to take government numbers with a grain of salt.

 

It was a somewhat dismal report where the participation rate fell to 61.4 percent; it's the lowest since September 2021. The labor force participation rate measures the percentage of the civilian population age 16 and older that is either actively working or actively looking for work.

 

It is one of the best measures of the economy's labor supply. From the data, it appears clear that the labor pool is shrinking. In which case, employers must compete harder for workers, wages rise, and that can keep wage inflation elevated.

 

In any case, the 50+ percent expectations of an interest rate hike in September in the betting markets dropped immediately with the data release. Bond yields fell, along with the dollar, and guess what skyrocketed? Precious metals.

 

That's right, gold and silver are back from the dead! This week, gold rose 7.7  percent while silver notched an 11.6 percentgain. For the most part, gold has been trading in a range for months. As oil prices gained, gold lost value. Silver fared even worse. Add in the rise in interest rates and the dollar (both kryptonite for precious metals), and it was close to a perfect storm for that asset class.

 

Now we seem to be reversing those trends, at least in the short-term. The Fed is on hold or appears to be for now, given that the last two Consumer Price Index CPI) reports have been benign. A third CPI report next Wednesday, August 12th, looks to be weaker as well. Weaker inflation numbers and now weaker job data put rate hikes on hold and may even push yields and the dollar even lower.

 

In addition, Mainland China is hoping to establish Hong Kong as a major trading market for gold among other metals. Remember, gold is entirely outside the global credit system. It cannot be frozen, sanctioned, or inflated away by another government's choices. Russia knew that and amassed its own holdings before it invaded Ukraine.

 

The People's Bank of China has been building up physical gold inventories in Hong Kong over the past several months after launching its Precious Metals Central Clearing Company. In June, they added 14.93 tons of gold. That's their single largest purchase since 2023.

 

I suspect this is adding upward pressure to the price of precious metals. They have slowly been moving their own substantial gold holdings (2,346 tons) from where it is kept in the London Metals Exchange back home to support their efforts in Hong Kong. Bottom line, Beijing is stocking the exchange it built rather than deepening the one its geopolitical rivals dominate.

 

My fears that August would turn out to be a month to be cautious seem ill-advised as we close out the first week. My caution has and will continue to be dependent on the conflict in the Middle East. In the meantime, the rotation back into technology continues. However, it is not at the expense of other areas.

 

The three major averages had healthy gains to finish the week, with the NASDAQ the winner, up 4.90 percent. The S&P 500 and small-cap Russell indexes each gained more than 3 percent while the Dow finished just shy of that.

 

Earnings results were the lynchpin of these moves. It also helped that we have seen a 9 percent decline in the price of oil. The hope that the U.S. will somehow negotiate a successful opening of the Straits of Hormuz was the flavor of the week. This could change next week; otherwise, the S&P 500 Index seems destined to make a record high.

 

As if food prices aren't high enough, climate scientists around the world are concluding that the October-December El Niño period this year could see numerous droughts, floods, and other climate catastrophes. If so, the impact on the supply of agricultural commodities could be serious.

 

There have been 20 El Niños recorded over the past 75 years. For those who don't know, this climate pattern occurs when unusually warm sea surface temperatures spread across the central and eastern Pacific Ocean. This causes a shift in global weather patterns that affects different regions in different ways. Some areas experience heavy rains while others wither under severe droughts.

 

Right now, more than half of England is already in a drought. Overall, as we watch and read about record heat in Europe and forest fires in France and Spain, something even more insidious is occurring in the Pacific Ocean. Scientists are already recording above-average sea surface temperatures for this time of the year (2.0 degrees above average). The tropical Pacific is warmer right now than at any time over the 45 years of satellite record keeping.

 

Consensus forecasts from scientists indicate this year's El Niño will peak at 3.6 degrees Celsius above normal. The record over 149 years of data is at most 2.75 degrees, which was set in 2015-2016. Throughout its history, only six El Niños reached the level of severity expected for this year's event.

 

Some are already calling it the "Super El Niño," which is expected to peak sometime this fall, at the very time of South America's planting season. As you might imagine, the weather could cause severe disruptions to planting cycles and to the harvest of food crops, including sugar, wheat, corn, soybeans, coffee, cocoa, and more.

 

How serious could it become? Back in 1877, the middle of the Pacific Ocean was hotter than anyone could recall. Rain did not come to India, Brazil, or China that year. The soil dried up as crops failed across five continents. Millions died, and it came down to governments deciding who starved and who ate. Fast forward to modern days.

 

You may remember the great run on the world's cocoa crop caused by El Niño a few years ago. The Ivory Coast, where 38% of the crop is grown, was deluged by heavy rains and extreme heat. Insects swarmed destroying the rest. Cocoa prices soared, hitting a record $10.97 a kilo in April 2024. That particular El Niño ranked fifth in modern record keeping. This one forming now is presently ranking number one.

 

In past El Niño events, wheat production in Australia fell dramatically and could again fall by 20-60 percent if drought becomes a factor. The same could be said for corn in Brazil, coffee in Vietnam, sugar in India, Thailand and Brazil, and grain supplies globally.

 

Compounding the weather threat is the impact of climate change, plus two wars at the same time, all of it disrupting the global food production system. The Strait of Hormuz has been shut to commercial traffic for five months. Aside from oil, much of the world's fertilizer production has also been choked off in the Strait, while Europe burns and crops wither. Russia and Ukraine together represent about 27-30 percent of the world's wheat crop. As their war drags on, both countries are aiming their missiles and drones at each other's wheat exports.

 

By this time, I think you are getting the picture. If there is a silver lining to this potential dark cloud, it is that El Niño may help grain production in the U.S. Warmer-than-normal weather conditions are expected across North America, which could benefit the growing cycle. At the same time, El Niño conditions might suppress Atlantic Ocean hurricanes. If farmers do not run out of fertilizer, the country could act as a buffer for grain markets worldwide, especially for corn and soybeans.

 

There is also a chance that between now and September, weather patterns change and the force of El Niño dissipates, along with rising temperatures in the Pacific waters. It is getting late in the day for that to occur, however. There could also be an end to Trump's war, and to the other war he promised to end on day one of his second term. If not, I expect that come winter, and just in time for the midterms, consumers will once again be hit with surging food prices on top of what we are already paying.