The recent U.S. economic data, especially concerning the manufacturing sector, is worrisome. What does it imply for the gold market?
Due to the hype surrounding the FOMC meeting, we did not cover the latest economic news. Let’s try to make it up.
First, the consumer price index was flat in November, while the core CPI (less energy and food) rose 0.2 percent monthly. However, inflation is no longer trending lower. On an annual basis, the core CPI increased 2 percent, while the CPI climbed 0.5 percent, marking the largest 12 month increase since the 12-month period ended in December 2014. It seems that some inflationary pressure may be building up in the economy next year. The impact on the gold market would be mixed. On the one hand, higher inflation would justify a more aggressive stance by the Fed, which would be negative for the yellow metal. On the other hand, higher inflation would lower real interest rates. The lower the real interest rates are, the better for the price of gold.
Second, the industrial production shrank 0.6 percent in November (the fastest drop since March 2012). The decrease was worse than expected and it was the third straight monthly decline in output. Over the past year, production is down 1.2 percent. Moreover, the October number was revised down, from -0.2 percent to -0.4 percent, while capacity utilization fell to 77 percent, a rate that is 3.1 percentage points below its long-run average. And the December Manufacturing PMI was at lowest level in just over three years.
Third, the weakness in manufacturing was reflected also in the regional reports. The Philadelphia Fed Manufacturing index returned to negative territory in December, decreasing from 1.9 to -5.9. This was the third negative reading in the past four months. Additionally, the December Empire State Manufacturing survey indicated that business activity declined for a fifth consecutive month for New York manufacturers. And the Kansas City manufacturing index returned back to contractionary territory in December.
The bottom line is that inflation picked up in November, but the contraction in industrial production reflects deflationary forces and should prevent inflation from rising quickly. The recession in manufacturing should (sooner or later) make the Fed tighten very slowly and gradually, or even to reverse its monetary stance (it is rather unusual for the central bank to hike its interest rates when industrial production contracts). Therefore, the current weakness in the manufacturing sector should be positive for the gold market.
Thank you.