The ISM non-manufacturing index fell to 51.4 percent in August. What does it imply for the gold market?
On Tuesday, we wrote about weak manufacturing data, as the ISM manufacturing data fell into contraction territory. On top of that, the recent data suggests that the service sector also faces significant difficulties. The ISM non-manufacturing index dropped significantly to 51.4 percent from 55.5 percent in July. It means that the service sectors still expanded, but the growth slowed down to the weakest pace in six years. Moreover, new orders fell nearly 9 percentage points in August. And new export orders and backlog orders declined into contraction.
The weak non-manufacturing data is worrisome – and potentially more than economic news about manufacturing. You see, analysts believe that manufacturing accounts only for a smaller part of the economy. However, the service sector is a different kettle of fish, as it is the biggest driver of the U.S. economy. Therefore, the decline in the ISM index gives more reason for the Federal Reserve to keep interest rates steady in September. Indeed, the market odds of a Fed hike this month declined to 15 percent from 21 percent the day earlier. Investors expect now March 2016 as the most probable date of the next hike.
Additionally, the Fed’s labor-market conditions index also fell in August, slipping back into negative territory after a positive reading in July. These pieces of news are positive for the precious metals market. Indeed, the price of gold rose on Tuesday. However, gold lost steam on Wednesday, perhaps due to profit taking. Another issue was a hawkish late-Tuesday speech of San Francisco Fed President John Williams who painted a rosy picture of the U.S. economy and said that a rate hike makes sense “sooner rather than later”.
Summing up, the August U.S. non-manufacturing data disappointed. For us, it practically excludes a Fed hike in September, which is positive news for the gold market. However, investors should remember that the Fed officials will chatter about hiking. Thus, the price of gold may be volatile in the near future, unless markets get a clear signal what the U.S. central bank is going to do this year. Also, today’s monetary policy meeting of the ECB’s Governing Council may influence the gold market.
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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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