Retail sales and industrial production fell more than expected. With a recession on the horizon, silver could fly if the Fed halts rate hikes!
It’s getting closer… slowly but firmly wrapping itself around the economy like an anaconda around its prey. I mean, of course, a recession. The latest economic data leaves no doubt that the US economy is losing momentum.
Retail sales fell 1.1% in December after being revised down 1% in November. The drop was bigger than expected and it was the biggest drop in 12 months. Fall is really unsettling as we talk about Christmas shopping. However, due to the drop in prices, sales partially declined.
Industrial production also surprised on the downside, falling 0.7% in December. It followed a 0.6% decline in November and was larger than expected. The decline was mainly due to manufacturing output, which fell 1.3% on an annualized basis in December and 2.5% in the fourth quarter. Higher interest rates and reduced purchasing power due to inflation weighed on the demand for goods.
The latest edition of the Beige Book does not inspire optimism either. According to the report, five districts of the Fed reported slight or modest increases in aggregate activity over the past few weeks, while six saw no change or a slight decline from the previous reporting period and one reported a significant decline.
Will softer data lead to a more dovish Fed?
Disinflationary pressures and widespread signs of slowing demand could prompt the Fed to further slow the pace of its rate hikes. That’s what Patrick Harker, President of the Philadelphia Fed, suggested this week, saying that “he’s poised for the US Federal Reserve to move to a slower pace of rate hikes amid some signs that hot inflation is cooling off.” Dallas Fed President Lorie Logan made a similar statement in her first major keynote speech at the new post:
If you encounter foggy weather or a dangerous freeway on a car trip, it’s a good idea to slow down. Likewise if you are a policy maker in today’s complex economic and financial environment. That’s why I supported the (Fed’s) decision last month to slow the pace of rate hikes. And the same reasoning suggests further slowing the pace at the upcoming meeting
Futures traders are also betting on such a scenario, as they see a more than 95% chance of a 25 basis point rise in two weeks, according to the CME FedWatch tool. The slowdown in rate hikes would be fundamentally positive for silver prices.
Effects on Silver
So what does all this mean for silver (and gold) prospects for 2023? Well, falling inflation and slowing economic momentum suggest the Fed may become less aggressive in raising interest rates. Any signs of more dovish monetary policy should be positive for silver and support the uptrend that started in November 2022 (see chart below courtesy of silverpriceforecast.com). As the US economy loses momentum, recession worries should also increase, which could also strengthen demand for safe havens for precious metals.
Contrary to intuition, silver prices fell yesterday. But it could have been a normal correction (remember silver is partly an industrial metal) or a reaction to some hawkish comments from the Fed’s Bullard and Mester about the need to raise the federal funds rate above 5%. But these two hawks are not the voting members this year. So don’t pay attention to the market noise, but focus on the fundamental trends. And they are clear: the economy is slowing, which will prompt the Fed to slow and eventually halt rate hikes.
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