The Week in Review: U.S. Employment, Manufacturing Gains as Swiss Goldbugs Vote for Deflation

The U.S. saw an improvement in domestic manufacturing and stronger employment data even as exports plummeted amidst weak international demand. In Europe, that decline indicated the rising threat of deflation, which is not deterring many Swiss voters from voting for more gold in their central bank.

On Monday, the Institute for Supply Management reported that U.S. manufacturing rose 2.4% month-over-month in October, while new orders rose 5.8% in the same period. The ISM said positive business conditions and greater demand were driving the push. 

The U.S. saw an improvement in domestic manufacturing and stronger employment data even as exports plummeted amidst weak international demand. In Europe, that decline indicated the rising threat of deflation, which is not deterring many Swiss voters from voting for more gold in their central bank.

On Monday, the Institute for Supply Management reported that U.S. manufacturing rose 2.4% month-over-month in October, while new orders rose 5.8% in the same period. The ISM said positive business conditions and greater demand were driving the push. 

However, Commerce Department data suggests that push has not been prompted by foreign buyers. According to data released this week, U.S. exports have fallen 7.6%, with trade gaps rising in the double digits for China (18.7%), South Korea (26%), Taiwan (11.3%), and Canada (60%).

All nations with free-trade agreements (FTAs) with the United States have seen a growth in exports to the U.S. and a decline in imports, indicating that American workers are not benefitting from those agreements.

Despite the headwind from weak demand abroad, American consumer demand is helping to drive domestic manufacturing. At the same time, the ISM’s non-manufacturing index saw a slight decrease to 57.1% in October, down from 58.6% in September.

Despite the weak non-manufacturing data, firings seem to be down. Weekly initial unemployment claims fell to a 4-week moving average of 279,000, the lowest point since April 2000. ADP announced this week that private employment rose by 230,000 jobs, well above expectations, in a sign that hiring growth remains robust.

Combining these datasets, many economists believe that a combination of re-shoring manufacturing that was sent offshore in the early 2000s has caused U.S. manufacturing to expand, while diminished purchasing power amongst American workers is causing demand for services to shrink.

However, greater job numbers could improve American purchasing power in the longer term, although very low labor participation suggests that there still remains an oversupply of labor relative to available jobs, which could keep wage growth muted for a very long time.

Swiss Goldbugs and ECB Doves

Against a backdrop of accelerating disinflation in the Eurozone, the Swiss are going to vote on a referendum that would require the Swiss National Bank to increase its gold holdings to 20% of total assets, up from its current holdings of less than 8%. The SNB and Switzerland’s Parliament, Federal Council, and National Cantons have publicly stated their opposition to the law.

The vote comes when gold has fallen to one of its lowest points in years, with spot gold falling below $1200 per ounce. The price is so low that many gold miners are expected to declare bankruptcy, since it will cost more than that price point to produce gold.

While Swiss voters are gearing up to hedge their currency against inflation with more gold, the ECB is fighting deflation. Mario Draghi kept rates unchanged in the Eurozone, causing European equities to rise higher later in the week. The deposit rate remains at -0.2% and the marginal lending rate stays at 0.3%. Draghi also stressed that the ECB will buy asset-backed securities if need be to stop deflation from beginning. The Bundesbank has openly opposed any ABS purchasing program, although its public statements have softened in recent weeks as QE becomes increasingly likely.