(Kitco News) - Gold prices are holding at session highs, continuing to attract fresh safe-haven bids after the U.S. manufacturing sector fell deeper into contraction territory.
The Institute for Supply Management (ISM) announced on Monday that its Manufacturing Purchasing Managers Index dropped to 48.5% in May, compared to the previous reading of 48.7%. The headline number was weaker than expected, as economists had anticipated a more neutral reading of 49.3%.
The report also noted stubborn inflation pressures, as the Prices Index was relatively unchanged at 69.4%. Producer prices were slightly better than expected, as economists had forecast the index to rise to 70.2%.
The gold market is not seeing a major reaction to the disappointing manufacturing data. Gold has gained fresh bullish momentum at the start of the week due to rising geopolitical tensions. However, analysts have said that the weak manufacturing numbers should provide some support for gold as fears of a potential recession begin to rise again.
Spot gold last traded at $3,371.70 an ounce, up 2.5% on the day.
Not only has manufacturing activity fallen to its lowest point in six months, but the report also noted broad-based weakness.
“Looking at the manufacturing economy, 57 percent of the sector’s gross domestic product (GDP) contracted in May, up from 41 percent in April. The share of manufacturing GDP registering a composite PMI calculation at or below 45 percent is a good metric to gauge overall manufacturing weakness; in May, this figure was 5 percent, a 13-percentage-point decrease compared to 18 percent in April,” said Susan Spence, Chair of the ISM Manufacturing Business Survey Committee.
Looking at the components of the report, the New Orders Index rose to 47.6%, up from April’s reading of 47.2%. At the same time, the Production Index rose to 45.4%, up from the previous reading of 44.0%.
The manufacturing labor market also continues to struggle; the Employment Index rose to 46.8%, up slightly from April’s reading of 46.5%.
Bill Adams, Comerica Bank's chief economist, said the report shows that the manufacturing sector is facing headwinds from the U.S. government’s trade policies.
“The headwinds from tariff increases are starting to show up in economic data. The ISM Manufacturing PMI reports that tariffs are a drag on business, as is the uncertainty about where tariffs will settle over the longer term,” said Adams. “The Fed will notice the widespread price increases reported in the ISM Manufacturing PMI survey. The ISM PMI’s price index tends to be a leading indicator of PPI and CPI inflation, and points to inflation picking up in the second half of the year. At their next decision June 18, the Fed will see the evidence of rising inflation pressures in surveys like the ISM PMIs as a reason to forgo further interest rate cuts. The Fed is likely to reiterate their ‘wait-and-see’ attitude toward setting interest rates at the June decision.”
