GoldPrice.

The Philadelphia Manufacturing Index sunk well below market expectations with a reading of -4.1 vs 14 expected. While a 3 point drop from the previous month’s reading of 17 was expected after weak manufacturing data was reported prior to todays data release, the -21.1 drop is highly unexpected and indicative that the problems in the manufacturing industry are worse than initially thought.

Key Takeaways

• The Federal Reserve Bank of Philadelphia has reported a significant drop in manufacturing activity in the release of the index data which measures general business conditions.
• The manufacturing index dropped from 17 to -4.1 vs 14 expected.
• The Fed states that this is the first negative reading since 2016.

The very weak manufacturing report shows broad decline across multiple components. The prices paid index dropped 32.7 to 21.8, with new orders sinking to negative territory (showing contraction rather than growth) with a reading of -2.4 vs 21.3 the month before. Shipments also contracted, coming in at -5.3 vs 11.4 previously, and the employee workweek dropped 1.3 points from 6 to 4.7.

Meanwhile, unfilled orders rose from 5.4 to 6.9 and deliveries rose from 13.4 to 13.6. Inventories saw a reversal from -7.6 to 3.3.

The measure of estimated business conditions six months from now gained 0.01 to 31.3 according to the Fed, with prices paid down 0.01 to 39.9. The capital expenditures index rose 0.01 to 31.7 from 31.6 the previous month, and the number of employees index dropped from 34.7 to 23.6. The average workweek index dropped significantly from 17 to 6.9.

The Fed stated that activity has weakened, but it’s worth pointing out that the employment barometer rose according to the report while future outlook remains positive among survey respondents.

Philadelphia Fed Manufacturing Index #PhillyFed

DIVING pic.twitter.com/PDolC3BQrg

— Roberto Mulazzi (@robertomulazzi) February 21, 2019

Expert Outlook

Commodities analysts at JPMorgan Chase expected gold to remain in the $1,200-1,250 range in the first half of this year, before rallying to $1,400 in the last three months, while Pepperstone head of research Chris Weston who accurately forecast prices surpassing $1,300 put forth a base outlook of $1,350 for 2019. Harry Tchilinguirian, Global Head of Commodity Markets Strategy at BNP Paribas, took a more bearish outlook due to muted inflation expectations as a result of recent central bank monetary policy signals, expecting a 2019 average of $1,145 for spot gold.

Market Reaction

Gold is trending downwards, sinking to session lows and last trading down 0.77% at $1,333.01/oz with a high of $1,345.28/oz and a low of $1,332.72. After climbing toward a 2.5 year high, gold has seen a trend reversal which may have been influenced by mixed-to-strong labor data. The weak manufacturing report has done little to curb the drop in gold prices.

Given that gold hit a 10-month high earlier in the week, the correction is not outside the range of normal pullback to be expected after sudden, strong gains.