Key US economic indicators like the latest ISM manufacturing and ISM non-manufacturing for the month of December have dipped into contraction zone.
US ISM manufacturing PMI contracted for the second month in a row as high-interest rates are weighing on the sector. The December reading at 48.40 is the lowest reading since February 2016 barring April 2020 Covid period reading.
The ISM non-manufacturing contracted unexpectedly in December as the reading came in at 49.60 as against the forecast of 55; it is much worse than the November reading of 56.50. This is the first contraction since the Covid period of May 2020.
With both the PMIs now in the contraction zone, the odds of a recession in the US have increased dramatically as ISM non-manufacturing data are much more reliable indicators than ISM manufacturing data.
It is worth noting that global manufacturing PMI data is at the lowest level since 2009, which shows that the global economic scenario has become disconcerting.
Gold is expected to draw support from China’s pent-up demand as the country reopens its economy.
Although the US non-farm payroll data showed that the headline figure of 2,23,000 jobs topped the forecast of 2,00,000, headline figures of October and November were revised lower by 21,000 and 7,000 jobs, respectively.
Gains in December job figures are largely due to part-time jobs as full employment is down by 4,44,000 since May.
Similarly, although the unemployment rate dipped to 3.50% in December as against the expectations of 3.70% and prior reading of 3.60% noted in November, wage gains in December came in at 0.3% m-o-m, which trailed the forecast of a gain of 0.4%, and is the slowest wage gain in four months.
It is expected that in light of unexpected contraction in the services sector and continuing contraction in the manufacturing sector, the US Federal Reserve may turn less hawkish, which has increased the odds of 25 basis points at the next FOMC meet in February as the investors pare down their 50-bps rate hike expectations.
In an alarming development in January, International Monetary Fund Chief Kristalina Georgieva warned that the IMF expects nearly one-third of the world to be in recession this year.
Fund managers are allocating some of their money in gold at the beginning of new year as they want to insure their portfolios on the dismal global economic outlook on a 12-month horizon.
The US Federal Reserve is expected to continue with its hawkish stance as it doesn’t want to repeat the mistakes of premature easing in the 1970s; however, hiking rates further amid huge concerns about the slowing down US economy will increase the possibility of a hard landing, which will eventually be positive for the yellow metal.
Gold is expected to test the stiff resistance zone of $1,900-$1,910. Buyers should hedge their gold buying positions by selling an equivalent amount of USD-INR as the Indian Rupee may appreciate on weakness in the US Dollar Index. Support lies around $1,850, followed by $1,820.
(The author is AVP, Fundamental currencies and Commodities analyst at Sharekhan by )
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