Gold jumped in early New York trading on Wednesday, boosted by a much weaker than expected Q4 advance GDP print. The first estimate of US Q4 GDP was -0.1%, on expectations of +1.2%. It would seem worries over the fiscal cliff and debt ceiling apparently were a bigger headwind than anticipated.
A big decline in defensive spending was a significant contributing factor, along with inventory builds and an $8.8 bln decline in net exports. While the Q4 contraction is a preliminary number, the possibility of a return to recession is back on everyone’s mind. Weaker GDP was broadly anticipated in Q1, and the Q4 miss will likely result in downward revisions to expectations for early 2013. The expiration of the payroll tax cut has already weighed considerably on consumer sentiment.
There has been much talk about the steep 6.6% drop in government spending, led by a 22.2% drop in defense spending. Nonetheless, it’s worth noting that the government spent $907.9 bln in Q4, which is $31 bln more than in Q4 2011. Additional massive spending cuts associated with the sequester still loom.
This certainly seems to put to rest the notion that the Fed is going to start removing accommodations any time soon. ZeroHedge tweeted the following this morning:
Fed stimulus injected in Q4: $165 billion. GDP added in Q4: -$5 billion
Given that the Fed has taken on the responsibility of reinvigorating the economy and driving the unemployment rate to 6.5%, clearly they need to be doing more and not less. The policy statement today is unlikely to have any fresh hints of hawkishness. Bernanke is not holding a post-statement presser, so it will be interesting to see if anything specific is said about growth prospects in the statement itself.
Attention now shifts to Friday’s jobs report, where median estimates suggest a 145,000 add to nonfarm payrolls. The jobless rate is expected to hold steady at 7.8%. Hardly a cause for celebration…or removal of accommodations.
Gold probably still needs to regain $1700 to start flushing out some of the shorts in the market and encourage more aggressive buying interest. The midpoint of the $400 range that has dominated for more than a year at $1721.61 is probably even more significant.
