Gold market performance has seen a significant turnaround, surging into favorable territory. This surge is due to increased safe-haven demand, triggered by a steeper-than-anticipated downturn in U.S. service sector activity in May, as revealed by the latest data from the Institute for Supply Management (ISM).
The ISM disclosed that its Services Purchasing Managers Index dropped to 50.3% in the previous month, a noticeable decline from April's figure of 51.9%. Economists, based on consensus predictions, were expecting an increase to 52.6%.
In these diffusion indexes, values above 50% denote economic growth, and values below indicate contraction. The distance an indicator is from 50% signifies the rate of change.
The gold market has bounced back strongly from a support level just above $1,950 per ounce. This rebound has been fueled by disappointing economic data. August gold futures were last seen trading at $1,976.50 an ounce, up 0.35% on the day.
Service sector activity has reached its lowest point since January. A slowdown in the growth rate for the services sector has occurred, mainly due to reduced employment and sustained improvements in delivery times and capacity. These changes have stemmed largely from sluggish demand.
A detailed look at the report's components reveals several concerning trends. The Business Activity Index decreased to 51.5%, down from April's 52%. At the same time, the New Orders Index fell to 52.9%, down from the previous reading of 56.1%.
The labor market also lost momentum last month, with the Employment Index falling into contraction territory with a score of 49.2%, down from April's 50.8%.
Interestingly, the report also noted decreasing inflation pressures, which could bode well for gold. The Prices Index fell to 56.2%, down from April's 59.6%.
Analysts suggest that gold is seeing new momentum as the disappointing economic data could prompt the Federal Reserve to halt its interest rate hikes. In response to the ISM data, markets are now predicting an over 85% chance that the Federal Reserve will keep rates steady at next week's monetary policy meeting.
At the same time, markets are predicting just a 50% chance of a rate hike in July. This data suggests that the U.S. economy could be heading toward a recession. The employment data starkly contrasts with May's nonfarm payrolls report, which indicated that 339,000 jobs were added last month.
However, the current situation is largely consistent with regional Fed activity surveys and the majority of other hard economic data. Due to a sharp drop in exports, a worsening downturn in business investment, and a slump in consumption growth, there is a suggestion that GDP growth in the second quarter will barely surpass zero.