Eurozone and US labor market weigh on precious metals

All precious metals ended the week lower compared with the preceding week. After a positive start into the new trading week, the beginning of May turned out to be a turning point for precious metals as they reached the high of the week. However, the major pressure set in the following day and again, it was the eurozone causing the reversal in many financial and commodity markets.

At the first trading day of a new month, markets are focused on the release of purchasing managers indices in the manufacturing sector for various economies. As many countries in the eurozone celebrated the Labor Day on May 1^st, the eurozone manufacturing PMI had been released the next day. In the US, the ISM manufacturing PMI posted a surprising increase, also the employment component increased. This had initially a positive impact on stock markets and also commodities. Also most precious metals reached the high of the week after the release of the ISM index. However, as the major fundamental drivers pared gains, precious metals also gave back a part of the advance.

The turning point has been the release of manufacturing PMIs in the eurozone. There is a widespread believe among investors and fund managers that factors, which are already discounted would not have an impact any longer. The events of Wednesday May 2^nd tell a complete different story. Markit, the company compiling many of the purchasing managers for various countries, released flash estimates for the major economies of the eurozone and for the eurozone already on April 23^rd. They already disappointed and came in far lower. As already the PMI in France and Germany as well as the in eurozone declined, one would have expected that also the Italian PMI would post a strong fall. However, the consensus of economists still overestimated the Italian PMI. Nevertheless, the market should have already discounted a negative surprise for further eurozone countries. The overall eurozone PMI had been revised down 45.9 from 46.0 in the flash estimate. Normally, a revision of 0.1 points is always within the margin of error. Nevertheless, if markets were rational and information efficient and do not react on information being already discounted, then they would not have reacted so strongly and negatively as they did on Wednesday.

Another negative factor had been US labor market data and again, markets showed a selection bias focusing more on negative figures and ignoring better more recent data. We have already pointed out several times that moveable holidays, like Easter, have an impact on the seasonal pattern of a time series. However, the seasonal adjustment procedures could even increase the distortions instead of smoothing them. The ADP estimate of private payrolls came in lower than expected, which intensified already the fall triggered by the PMI in the eurozone. However, the ADP estimate has only a very poor tracking record. Also on Friday, the non-farm payrolls came in lower than the consensus of Wall Street economists predicted. Both figures include the impact of the Easter holiday season and thus, should be taken with some care. But, it was the major focus of financial and commodity markets.

The initial jobless claims posted a strong decline from 392K to 365K. This indicates that once the impact of the Easter holidays is out of the statistics, the underlying trend in the labor market remains positive. Furthermore, the non-farm payroll figures for the two preceding months have been revised up. Normally, financial and commodity markets have taken the revisions into account. What is relevant is the number of non-farm payrolls. If the basis of the calculation for the change in non-farm payrolls is revised, these revisions play a crucial role. If the estimated change of non-farm payrolls is missed, but preceding months non-farm payrolls (the level) are revised up, then the number of non-farm payrolls implied by the estimate of the change in non-farm payrolls might still be reached or could even be exceeded. In the case of the May US labor market report, the change of the non-farm payrolls plus the revisions of the two preceding months came close to the latest consensus call of 170K. From our point of view, this is not a reason for such a negative reaction in stock and commodity markets. Furthermore, the unemployment rate declined further to 8.1%. One should not forget that the Fed’s second target is the rate of unemployment, not the non-farm payroll change. Some commentators argue that the decline of the unemployment rate was only due to people leaving the work force according to the household survey. However, as the baby boomers are going to retire, they also leave the work force. Thus, higher numbers of people leaving the work force due to retirement compared to the situation some years ago have to be expected.

However, what was striking has been the reaction of the precious metals on Friday after the release of the US labor market report. While during the two days before, all precious metals declined, gold and silver rebounded and managed to close even above the opening price (according to data from ThomsonReuters). On the other hand, the PGMs continued to trade lower and ended the session near the low of the day. The major fundamental drivers of gold and silver were negative, thus, one would have expected also a negative day for gold and silver. One explanation for this move might be the elections taking place in the eurozone. Greece is electing a new parliament and some observers fear that a party might win the majority, which favors an euro exit. Also France is electing a new president. The ballots are still open at the time of writing this article. However, in France, it should be now widely discounted that incumbent president Sarkozy is going to be defeated by the candidate from the Socialist Party, Mr. Hollande. In Greece, the potential for a surprising election result is bigger. However, the polls still saw the most likely case that the next government would be again a coalition of the parties supporting the current government of former ECB vice-president Luca Papademos. But as had been seen, what should already be discounted could nevertheless have an impact on metals prices.

The selective bias of financial markets, reacting stronger on data pointing to slower growth than on positive economic figures, the weakness in the major fundamental drivers for precious metals, as well as the flight into the “perceived” safe havens of US Treasury notes and German Bunds, this all indicates that the risk for precious metals is still biased to the downside.