U.S. consumer spending was flat in August. What does it imply for the gold market?
Personal consumption expenditures were unchanged in August after a 0.4-percent increase in July. The flat number was below expectations and resulted from lower sales of new cars and trucks. It was the weakest reading since March. Actually, if inflation is taken into account, U.S. consumer spending dropped 0.1 percent jump. It means that real personal outlays decreased for the first time since January. On an annual basis, consumer spending rose 3.6 percent and remained relatively solid, as one can see in the chart below.
Chart 1: Personal consumption expenditures from August 2011 to August 2016 (as % change from year ago).
Soft consumer spending was partially caused by a slowdown in income growth. Personal incomes rose just 0.2 percent in August, the smallest increase since February. On an annual basis, the pace of growth of personal income continues its slowdown started in Autumn 2014, as one can see in the chart below.
Chart 2: Personal income over the last 5 years (as percent change from year ago).
Last but not least, inflation is still running below the 2-percent target set by the Fed. The PCE price index ticked up 0.1 percent, after being flat in July, while its core version edged up 0.2 percent after a 0.1 percent rise in the previous month. On an annual basis, the PCE price index increased 1.0 percent, while the core index excluding food and energy prices rose 1.7 percent. It means that the inflationary pressure increased in August slightly, as one can see in the chart below.
Chart 3: PCE Price Index (blue line) and Core PCE Price Index (red line) as percent change from year ago, from 2011 to 2016.
The take-home message is that the August personal income and outlays report was disappointing. After the release of the report, the GDPNow model forecast of real GDP growth for the third quarter of 2016 declined to 2.4 percent from 2.8 percent. Hence, the slowdown in consumer spending should strengthen the dovish camp within the FOMC, which would be positive for the gold market. On the other hand, the rise in inflation may justify a Fed hike in December. The market odds of such a move increased from 48.1 to 55.7 percent on Friday. Therefore, investors focused on the (slowly) building inflationary pressure rather than on the reduced expectations of GDP growth. This is bad news for the gold market. Positive economic data published this week, such as the return of the ISM manufacturing index to positive territory, also put pressure on gold prices.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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