Gold and the Cracks in the U.S., Japan and Germany's Economic Data / Commodities / Gold & Silver 2019

Talk of a synchronized world - all three economicsuperpowers are in a recession! The U.S. suffers from industrial recession,Japan from export recession, while Germany may fall into a broad economicrecession. Will the gold market warm up to these news?

Recent U.S.Data Shows Industrial Recession

The recent inversion of the yield curve has sparkedrecessionary fears. Some of the newest pieces of the U.S. economic data confirmthe gloomy outlook. For example, the industrial production fell 0.2 percent in July, the seconddrop in the past four months, according to the Federal Reserve, as one cansee in the chart below. Although the scale of slump might be overstated due tothe Hurricane Barry hitting oil production in the Gulf of Mexico, the industrial sector remains in atechnical recession.

However, other recent economic reports have been morepositive. The retail sales surged 0.7 percent in July, beatingexpectations. As the chart below shows, there is also animprovement on an annual basis. What is more, when omitting auto dealers andgasoline stations, retail sales scored an even stronger gain of 0.9 percentlast month.

Chart 1: Annual percentage change in the US industrialproduction (green line) and the retail sales (red line) from January 2010 toJuly 2019. 

Moreover, the CPI increased 0.3 percent in July after rising 0.1 percent inJune, according tothe BLS. The core CPI also rose 0.3percent, the same increase as in June. On an annual basis, the overall inflation rate jumped1.8 percent, an acceleration from 1.6-percent change in June, whilethe core CPI rose 2.2 percent over the last 12 months, slightly more than the2.1-percent increase for the period ending June, as the chart below shows.

Chart 2: Annual percentage change in the US CPI (greenline) and the core CPI (red line) from January 2015 to July 2019.

Although higher inflation is not good news for theconsumers, it can soothe the nerves of doves among the FOMC and allthose believing that subdued inflation is something bad for the economy.However, the markets still expect two more interest rate cuts this year - themodest acceleration in inflation notwithstanding. It’s the best fundamental combo for gold: higher inflation but still dovish Fed.

Japanese andGerman Exports Suffers

Although the factory sector is in technical recession, the U.S. economy looks on a much moresolid footing than Japan or the Eurozone does. In the Land of the RisingSun, the exports fell 1.6% from a year earlier, marking eighth decline in arow. At the same time, manufacturers’ confidence turned negative for the firsttime in over six years

When it comes to Germany, the Eurozone’s economicpowerhouse, it might be already inrecession. The GDP fell 0.1 percent in the second quarter of 2019. To makematters worse, the Bundesbank said on Monday that the German economy could havecontinued to shrink over the summer. The downturn stems from the weakindustrial production amid a dearth of orders. The trade wars finally hit bothexport-focused economies. Although the services sector should provide thesupport for Germany (and Japan), there are some signs that the industrialdownturn will be felt in the labor market.

Given that slump and the fact that inflation in theEurozone is now running at 1 percent, the European Central Bank coulddecide in September on further stimulus, perhaps even bigger than expected. It should weaken both the euro and gold against the U.S. dollar. However,it can also increase the safe-havendemand for gold, if the ECB’s action scares Europeaninvestors.

Implicationsfor Gold

What does it all mean for the gold market? On theother hand, the U.S. remains in much better shape than Japan or the Eurozone. This should support the U.S. dollar,creating downward pressure on the gold prices. On the other hand, theglobal slowdown may eventually spread into the U.S. one day. When the recessionarrives to the States – and the yield curve inversions suggests that it is onlya matter of time – gold should shine.

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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