Retail sales rose 0.6 percent, while the PPI increased 0.3 percent in December. What does it imply for the gold market?
Sales at U.S. retailers increased 0.6 percent last month, according to the U.S. Department of Commerce. The rise followed a 0.2 percent increase in November (after an upward revision from 0.1 percent) and fell short of expectations, slightly. The increase was triggered by strong performance among auto dealers (a 2.4 percent jump). If this sector is excluded, retail sales rose only 0.2 percent. And when we also extract gas dealers, retail sales were flat. Yes, flat in December – the biggest shopping season.
As one can see in the chart below, the annual pace of growth of retail sales accelerated a bit in November. However, the GDPNow model forecast for real GDP growth for the fourth quarter of 2016 declined from 2.9 to 2.8 after the release of the retail sales report.
Chart 1: Retail sales excluding food services (blue line) and retail and food services excluding motor vehicles and parts dealers (red line) as percent change from year ago, from December 2011 to December 2016.
Soft retail sales and the reduced growth forecast should support the price of gold. However, there was one more important report due on Friday. The Producer Price Index increased 0.3 percent in December, in line with expectations. On an annual basis, the PPI for all commodities surged 2.6 percent, while the PPI for final demand jumped 1.6 percent, the strongest gain since the summer of 2014, as the chart below shows.
Chart 2: The PPI for all commodities (blue line) and the PPI for final demand (both indices as a percent change from year ago) from December 2011 to December 2016.
The jump in wholesale prices is a harbinger of rising inflation and may prompt the Fed members to adopt a more aggressive stance. This is what investors expect, since the market odds of an interest rate hike in March rose from 20.2 percent to 24.5 percent. However, after the initial decline in gold prices in the aftermath of both reports, the price of gold quickly rebounded and ended a day with a modest gain. It implies a certain resilience of gold, or that, as we wrote on Friday, “The lack of clarity on Trump’s economic policies is now one of the most significant drivers of gold prices.”