The economic data leaves no doubt that the U.S. economy is losing momentum, with Retail sales and industrial production falling more than expected. With a recession on the horizon, silver may fly if the Fed stops the hikes.
Retail sales fell 1.1% in December, following a downwardly revised drop of 1% in November. The decline was larger than expected, the biggest decrease in 12 months. The fall is alarming as we are talking about the holiday shopping period. However, the sales were partially reduced because of the price decline.
Industrial production also surprised negatively, falling 0.7% in December. It followed a 0.6% decrease in November and was larger than expected. The decline was driven mainly by manufacturing output which fell 1.3% in December and moved down 2.5% at an annual rate in the fourth quarter. Higher interest rates and reduced purchasing power by inflation hurt demand for goods.
The latest edition of the Beige Book also doesn’t inspire optimism. According to the report, five of the Fed’s districts reported slight or modest increases in overall economic activity over the last several weeks. Six noted no change or slight declines from the previous reporting period, and one cited a significant decline.
Will Softer Data Prompt a More Dovish Fed?
The disinflationary pressure and widespread signs of weakening demand could encourage the Fed to further decelerate the pace of its interest rate hikes. This is what Patrick Harker, Philadelphia Fed President, suggested this week:
"He‘s ready for the U.S. central bank to move to a slower pace of interest rate rises amid some signs that hot inflation is cooling off.”
Dallas Fed President Lorie Logan expressed a similar view in her first major policy speech at the new post:
"If you’re on a road trip and you encounter foggy weather or a dangerous highway, it’s a good idea to slow down. Likewise, if you’re a policymaker in today’s complex economic and financial environment That’s why I supported the (Fed’s) decision last month to reduce the pace of rate increases. And the same considerations suggest slowing the pace further at the upcoming meeting."
Futures traders also bet on such a scenario, as they see a more than 95% chance of a 25 basis point hike in two weeks, according to the CME FedWatch Tool. The slowdown in hikes would be fundamentally positive for silver prices.
Implications for Silver
What does it all mean for the silver (and gold) outlook for 2023? The falling inflation rate and weakening economic momentum imply that the Fed may become less aggressive in raising interest rates. Any signs of a more dovish monetary policy should be positive for silver and support the upward trend that started in November 2022 (see the chart below, courtesy of silverpriceforecast.com).
Moreover, as the U.S. economy loses momentum, recession worries should intensify, strengthening the safe-haven demand for precious metals.
Counterintuitively, the price of silver declined yesterday. But it could have been a normal correction (please remember that silver is partially an industrial metal) or a reaction to some hawkish comments of the Fed’s Bullard and Mester about the need to move the federal funds rate above 5%. But these two hawks are not the voting members this year.
Thus, ignore the market noise but focus on the fundamental trends. And they are clear: the economy is slowing down, which will prompt the Fed to decelerate and even stop the rate hikes later.
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold, and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. To determine the latter, many additional factors need to be considered (i.e., sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns, and more), and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.