2. Points To Be Covered Today:
• The USDX And U.S. Treasury Yields
• Pricing Pressures Hit New All-time Highs
• US Goods Producers Continued To Register
Marked Upturns
• The Headline Index & The New Orders Index
Registered
• The Inflationary Alarm
• The Bottom Line
3. The USDX And U.S. Treasury Yields
• If the USDX and U.S. Treasury Yields benefit from
disappointing payrolls, what will that bode for
gold and the rest of the precious metals?
• With the Delta variant upending global economic
activity, the latest coronavirus strain has grinded
the reopening momentum to a halt.
• And while the lack of “substantial further
progress” allows the Fed (and other central
banks) to air on the side of caution, the Delta
variant has only accelerated the inflationary
fervor.
4. Pricing Pressures Hit New All-time
Highs
• Case in point: IHS Markit released its U.S.
manufacturing PMI on Sep. 1.
• And while the headline index declined from 63.4 in
July to 61.1 in August, the print was labeled the
“softest for four months, but nonetheless among the
strongest seen in the over 14-year series history.”
• More importantly, though, as “material shortages
hampered output growth [and] supplier delivery times
increased markedly to one of the greatest extents on
record,” pricing pressures hit new all-time highs.
6. US Goods Producers Continued To
Register Marked Upturns
• Moreover, while the Delta variant has depressed
business sentiment, once the health crisis abates,
renewed economic momentum should support a
higher USD Index and higher U.S. Treasury yields.
• For context, Siân Jones, Senior Economist at IHS
Markit, wrote:
• “US goods producers continued to register marked
upturns in output and new orders in August, as
demand flourished once again.
• That said, constraints on production due to material
shortages exerted further pressure on capacity as
backlogs of work rose at a near-record rate.”
7. The Headline Index & The New Orders
Index Registered
• And while COVID-19 has made its presence felt, the report
concluded with:
• “Business confidence regarding the outlook for output over
the coming year strengthened in August. Greater optimism
was linked to hopes of further growth in client demand.”
• Building on that theme, the Institute for Supply
Management (ISM) also released its manufacturing PMI on
Sep. 1. And here, the headline index increased from 59.5 in
July to 59.9 in August.
• Moreover, “the New Orders Index registered 66.7 percent,
increasing 1.8 percentage points from the July reading” and
“the Backlog of Orders Index registered 68.2 percent, 3.2
percentage points higher than the July reading.”
8. Business Survey Committee Report
• Timothy R. Fiore, Chair of the ISM Manufacturing
Business Survey Committee, wrote:
• "Business Survey Committee panelists reported
that their companies and suppliers continue to
struggle at unprecedented levels to meet
increasing demand.
• All segments of the manufacturing economy are
impacted by record-long raw-materials lead
times, continued shortages of critical basic
materials, rising commodities prices and
difficulties in transporting products.
9. Optimistic Panel Sentiment Remained
Strong
• The new surges of COVID-19 are adding to
pandemic-related issues — worker absenteeism,
short-term shutdowns due to parts shortages,
difficulties in filling open positions and overseas
supply chain problems — that continue to limit
manufacturing-growth potential.
• However, optimistic panel sentiment remained
strong, with eight positive comments for every
cautious comment.”
10. Pricing Pressures Increased In August
• Likewise, while pricing pressures increased in August
(though, at a slower pace), the report revealed that “16 of
18 industries reported paying increased prices for raw
materials.”
• As for the regional surveys, the ISM released its Chicago
Business Barometer on Aug. 31.
• And while the headline index decelerated month-over-
month (MoM), “Order Backlogs climbed 11.6 points to
81.6.
• The highest reading since 1951” and “Supplier Deliveries
shot up 6.3 points to a three-month high of 92.8, with one
survey respondent reporting the worst delivery times in
three years.”
13. The Inflationary Alarm
• Also sounding the inflationary alarm, the National
Restaurant Association released its State of the Restaurant
Industry report on Aug. 31.
• For context, the mid-year update covers key industry
indicators and trends as of June/July through extensive
surveys of restaurant operators and consumers.
• And while Fed Chairman Jerome Powell said at the Jackson
Hole Economic Symposium on Aug. 27 that “we see little
evidence of wage increases that might threaten excessive
inflation,” the year-over-year (YoY) percentage increase in
the Employment Cost Index (ECI) in the second quarter
(3.55%) was the highest since 2002.
• For context, Powell actually cited the Atlanta Fed’s wage
tracker and the ECI to support his conclusion.
15. Overall Wage Growth Remains
Moderate - I
• However, more representative of the current climate,
average hourly earnings in the leisure & hospitality sector
surged by 9.63% YoY on Aug 6.
• And with the National Restaurant Association revealing
that “labor challenges intensified in the first half of the
year” and that “75% [of respondents] reported recruiting
and retaining employees was the top challenge facing
their business,” wage inflation is poised to accelerate.
• For context, only 8% of respondents cited hiring as their
“top challenge” in January but “the June/July number
[75%] represents its highest level in nearly 20 years of
the Association’s monthly tracking survey.”
17. Hope For Transitory Inflation
Beginning To Fade - I
• To explain, the color blocks above track Fed officials’
messaging of “transitory” and other words of a similar
meaning.
• If you analyze the right side of the chart (though, it’s
hard to make out), you can see that like-minded language
peaked on Jul. 13 and has been moving lower ever since.
• Similarly, Fed officials’ passive language has also moved
sharply lower.
• And with terms like “patience,” “assessing” and “long
way” being used increasingly infrequently, it signals that
conflicting opinions and taper anxiety remain ripe within
the Fed.
18. The Bottom Line
• While the ADP’s private payrolls disappointed on
Sep. 1 and U.S. nonfarm payrolls may follow suit
on Sep. 3 due to the Delta variant (though, the
ADP report and U.S. nonfarm payrolls have little
to no correlation), taper momentum is still
building.
• And with the USD Index and U.S. Treasury yields
poised to benefit from the eventual
announcement, precious metals investors are
demonstrating heightened hesitation.
19. The Bottom Line - I
• In conclusion, the PMs moved lower on Sep. 1
despite a weaker USD Index and mixed
performance from U.S. Treasury yields.
• And with the latter’s fundamentals only
obstructed by the Delta variant, progress on the
health front should add to the former’s ills over
the medium term.
• As a result, the seeds have been sown for another
sharp decline in precious metals prices and it’s
likely only a matter of time before the climax
unfolds.