Key data shifts market sentiments
Last week a lot was happening for gold globally and in the domestic market. While there was important data released from the US, in the domestic market too all eyes were glued to the interim budget. While internationally, Fed rate hike is the topic of discussion, in India Gold duty cut was also being discussed strongly. We shall discuss the budget later.
Let’s have a look at the key economic numbers and how it affected gold and dollar.
- Nonfarm payrolls rose more than 300K, which was significantly better than the 165K forecast and matched December’s +300k rise
- Manufacturing activity accelerated
- University of Michigan Sentiment index was revised slightly higher for the month of January.
- Stocks extended their rise.
Not only does this report tell us that the government shutdown had limited impact on the labor market but after revisions, job gains averaged 241K over the past 3 months. However even though the labor market is on fire, wage growth is slowing and there’s a very good chance of downward revisions next month. More importantly the change in the Federal Reserve’s monetary policy statement is significant enough to keep the US dollar under pressure so don’t trust the rally.
Although employment continues to expand, wage growth remains tepid. The report said that average hourly earnings increased 0.1% last month or by 3 cents, missing expectations. Economists were expecting to see wages increase 0.3%. For the last 12 months wages increased 3.2%. The U.S. dollar rebounded against all of the major currencies on Friday on the back stronger economic data. A lot of the Fed’s concerns stem from events like Brexit, funding for the US government and US-China trade issues that could be resolved over the next few months
The gold market saw some selling pressure Friday after the U.S. labor market showed strong growth in January, according to the latest government employment data. This sentiment continued as the week opened on a negative note for gold.
Gold prices dipped slightly on Monday as the dollar held steady on upbeat U.S. jobs and factory data that prompted markets to reduce bets on a rate cut later this year.
In the Indian markets, gold markets weren’t much active as while jewellers held off on purchases in anticipation of the country’s budget presentation on Friday.
India’s bullion industry has been urging a tax reduction to combat smuggling, which has increased since the country raised the import duty to 10 percent in August 2013 to narrow its current account deficit.
However, the interim budget presented by the Indian government on Friday did not include a change in the duty and hence not much activity was seen.
But India’s counterpart China, was showing a different t picture altogether. The demand for gold in China was quite on the rise.
On the occasion of Lunar year (which falls in the first week of February), generally, gold is considered as one of the best gifting medium. Demand for physical gold gathered usually increases in China ahead of the Lunar New Year holiday.
Another interesting gold purchase figure that saw record highs was from the central banks.
Official gold purchases reached a new record in 2018 as central banks continued to diversify away from the U.S. Dollar. Not only was 2018 a banner year for central bank gold purchases, but it was also the highest amount for more than five decades. Central banks haven’t bought this much gold in one year since Nixon ended the convertibility of the U.S. Dollar into gold in 1971.
Despite the latest economic reports, the economy is still slowing but if Congress passes a permanent spending increase, the UK reaches a withdrawal agreement with the EU and the US forgoes further tariffs on China, 2 rate hikes this year could still be justified. With that in mind, any one of these discussions could go south, sending the markets into turmoil. Press conferences after every meeting this year gives the Fed the flexibility to change policy as needed and so far, domestic and global uncertainty justifies the need for patience. There’s not much in the way of US data, so the dollar could resume its slide.