Wednesday was full of important economic news. Financial media focused on the recent issue of the beige book, however we should not neglect the reading of the Empire State Manufacturing Index and data on U.S. Industrial Production. Why are they so important and how are they connected to the gold market?
The beige book is not easy to interpret as it covers many different (and anecdotal) data from distinct areas, often painting an uneven economic picture. Thus, some analysts claim that the Fed’s report “shows U.S. economy is shaking off the winter chills”, while other point out that the beige book painted a rather uninspiring picture with “slight” or “moderate” growth across the country. For sure, some positive information can be found in the report, especially on real estate and housing or anecdotal evidence on upward wage pressures. However, “layoffs related to the decline in oil and gas prices were reported in multiple Districts,” and manufacturing was disappointing across the country, due to “the strong dollar, falling oil prices, and the harsh winter weather”.
Indeed, the Empire State Manufacturing Index (manufacturing survey from New York) declined significantly in April, falling to a negative 1.2 from a positive 6.9 in March. Although it was the first negative reading since December, the new orders sub-index declined for the third month in a row.
Nationwide industrial production did not performed much better and it decreased 0.6 percent in March after increasing 0.1 percent in February. Excluding the volatile auto products fueled by the cheap credit, whose production rose by 3 percent, the reading would be much worse. It means that industrial production fell by 1 percent annually in the first quarter of 2015, becoming the first quarterly decrease since the second quarter of 2009. Thus, the U.S. industry is collapsing due to burst of the fracking boom and weak foreign demand for manufacturing goods (partially because of the strong greenback and partially because of the global economic slowdown, but financial analysts prefer to write how many times “the weather” was mentioned in the beige book).
It is true that the decline in industrial production in March was caused mainly by a decline in the output of utilities (therefore, the harsh winter and boosted heating was actually positive for the industrial statistics), but throughout the overall Q1 the output of utilities was positive, while outputs of manufacturing and mining were negative. In consequence, “capacity utilization for the industrial sector decreased 0.6 percentage point in March to 78.4 percent, a rate that is 1.7 percentage points below its long-run (1972–2014) average”.
What does it all mean for the gold market? Well, gold futures rebounded after disappointing data on manufacturing were published. Weak industrial activity eases concerns that the economy is strong enough for raising interest rates. The mainstream view is that the first quarter was impacted by the harsh winter, but we are getting first April data suggesting that not weather, but more fundamental factors were responsible for the weak Q1.
To sum up, manufacturers have been struggling in recent months because of the global slowdown and rising U.S. dollar. The general trend for industrial activity continues to weaken, although the harsh winter has already ended. Next month’s data will be critical for assessing whether it is a temporary setback or a cyclical slowdown. In both cases, gold should gain as a traditional safe haven, however in the latter case it should find an additional support in the form of a more dovish stance of the Fed.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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