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(Kitco News) - The gold market has retraced its overnight losses and jumped into positive territory on the day as the precious metal sees renewed safe-haven demand as activity in the U.S. service sector falls more than expected in May, according to the latest data from the Institute for Supply Management (ISM).
Monday, the ISM said its Services Purchasing Managers Index fell to 50.3% last month, down from April's reading of 51.9%. According to consensus estimates, economists were looking for an increase of 52.6%.
Readings above 50% in such diffusion indexes signify economic growth and vice-versa. The farther an indicator is above or below 50%, the greater or smaller the rate of change.
The gold market has seen a solid bounce off of support just above $1,950 an ounce, and the disappointing economic data is providing new momentum. August gold futures last traded at $1,976.50 an ounce, up 0.35% on the day.
Activity in the service sector has fallen to its lowest level since January.
"There has been a pullback in the rate of growth for the services sector. This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the Supplier Deliveries Index) and capacity, which are in many ways a product of sluggish demand," said Anthony Nieves, chair of the ISM Services Business Survey Committee. "The majority of respondents indicate that business conditions are currently stable; however, there are concerns relative to the slowing economy."
Looking at the components of the report, The Business Activity Index fell to 51.5%, down from April's reading of 52%; At the same time, the New Orders Index dropped to 52.9%, down from the previous reading of 56.1%.
The labor market also lost momentum last month, with the Employment index falling into contraction territory with a reading of 49.2%, down from April's reading of 50.8%.
Positive for gold, the report also noted falling inflation pressures. The Prices Index dropped to 56.2%, down from April's reading of 59.6%.
Analysts have said that gold is seeing new momentum as the disappointing economic data could force the Federal Reserve to end its interest rate hikes. In reaction to the ISM data, markets see a more than 85% chance that the Federal Reserve will leave rates unchanged at next week's monetary policy meeting.
At the same time, markets see only a 50% chance of a rate hike in July.
Andrew Hunter, deputy chief U.S. economist at Capital Economics said that the ISM data “suggests the economy is barreling towards recession.”
He added that the employment data is painting a dramatically different picture from May’s nonfarm payrolls report, which said that 339,000 jobs were created last month.
“Nevertheless, it is broadly consistent with the regional Fed activity surveys and with most of the other hard economic data – which, thanks to a plunge in exports, a worsening downturn in business investment and a slump in consumption growth, suggest that GDP growth will be barely above zero in the second quarter,” he said.
