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A key index used to measure business conditions in New York fell to 3.7 in March, the lowest in almost two years. After months of decline, there was an uptick in February which saw a reading of 8.8, but the uptrend has not continued for the final month of Q1.

Key Takeaways

• The Empire State Manufacturing Index dropped from 8.8 to 3.7 vs 10 expected.
• The March reading is the lowest in almost two years, although any figure over 0 still indicates growth.
• The ongoing trade war with China has severely impacted US manufacturing and is the likely cause of the decline.

Within the overall index, the new orders index dropped 4.5 points from 7.5 to 3 in March. Shipments slipped 2.7 points to 7.7, the lowest reading in over two years. The average workweek saw the first negative reading in two years, although the index for the number of employees rose 10 points to 13.8 as the labor market continues to tighten with national unemployment dropping to 3.8% recently.

Inflation pressures climbed higher with the Prices Paid index rising from 27.1 to 34.1, a reading which could be bullish for gold.

Manufacturers responding to the survey maintained a relatively positive outlook for the future despite the undeniably poor performance in recent months. The Empire State Manufacturing Index has now turned over a reading of under 10 for three months in a row, indicating a slower Q1 for 2019 than the previous year. The index averaged at 19.8 for 2018.

March's 3.7 print on General Business Conditions from the New York Fed Empire State Manufacturing Survey was a downside miss to market expectations (10.0), below the lowest in the Reuters poll (5.0), lower than January (3.9) and now the lowest since May 2017 (3.4). pic.twitter.com/1mddwkMsZv

— Jeoff Hall (@JeoffHall) March 15, 2019

Trade War May End Soon

The trade war with China has been the main cause of disarray in the manufacturing industry which had been going strong before tensions with Beijing erupted over alleged unfair trading practices and theft of intellectual property. US President Donald Trump stated recently that the trade war negotiations would come to an end within the next month, one way or another, stating that the US was “doing very well with China talks”.

In a St Patrick’s Day celebration with the political leader of Ireland, Taoiseach Leo Varadkar, Trump stated:

"We'll have news on China probably -- one way or way or the other, we're going to know over the next three to four weeks.” Treasury Secretary Steven Munchin confirmed on Thursday that a deal will be finalized shortly, adding that there is a lot of work to be done with a 150 page document being drafted as an agreement between both nations.

Treasury Secretary Steven Mnuchin told a congressional committee earlier Thursday that he expects the deal to be finalized soon, but cautioned that the process is complex.

The document will include "very clear enforcement provisions and we want to get the agreement right," he said. "That's more important that the exact timing."

Market Reaction

Spot gold has broken the crucial $1,300/oz line of resistance following the weak manufacturing report. 

Gold is now trading at $1,302.24/oz and up 0.68% with a high of $1,304.32/oz and a low of $1,294.22/oz. April Comex Futures last traded at $1,302.00/oz, up 0.53%.

Spurred on by the news of climbing inflation pressures and poor performance in manufacturing, the appeal of gold as a risk aversion hedge has increased and the price action continues to fluctuate following the report.