US economic policy uncertainty hits 14-month high

Economic policy uncertainty in the US hit a 14-month high in November according to the latest data from The US uncertainty index rose by 24 points as attention centred on the likelihood of the US ‘Fiscal Cliff’ following the outcome of the US Presidential Election. Meanwhile in Europe the economic policy uncertainty index fell 5 points as progress was made on the Greek debt restructuring.

The US and European indices have generally fluctuated between 150 and 200 since mid-2008 with both US and European indices now close to mid-2008 levels. Over the same period the gold price is up over 80%.

However, since the uncertainty indices peaked in Aug/Sep 2011 the gold price has traded between $1600 and $1800 per oz. It remains to be seen whether the current spike in US economic policy uncertainty will be reflected in further increases in the gold price.

Economic policy uncertainty index

More fundamentally the increase in uncertainty in the US would normally be expected to have knocked business confidence, potentially delaying investment decisions until the outcome of the ‘Fiscal Cliff’ negotiations. Moody’s Analytics survey of business confidence shows that US businesses remain nervous over the future with sentiment at a low level.

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Chinese PMI preview – not as bad as feared?

China’s official purchasing managers index (PMI) is released 2am GMT / 9pm EST tonight.

The manufacturing PMI fell from a 2012 peak of 53.3 in April to 50.1 in July (a number above 50 indicating expansion).

HSBC/Markit’s alternative Flash PMI, released earlier this month showed activity falling to a 9-month low. However, given the wide divergence between the offical PMI and the HSBC/Markit PMI (at least on a month by month basis) care should be taken in reading too much into the slump.

China PMI official vs HSBC

The official PMI is likely to give an indication of whether China’s government are about to release a new stimulus package. If the result is particularly bad commodity prices are likely to pickup next week on anticipation of a recovery in demand for commodities.

A Bloomberg poll of economists expect the manufacturing PMI to ease slightly to 50 – in effect zero growth.

However what is interesting is the remarkable seasonality in Chinese manufacturing activity. In 6 of the past 7 years (as far as the data goes back) activity has increased between July and August. The exception was 2008 when it was unchanged.

Given this pattern (and admittedly ignoring every other bit of anecdotal evidence I’ve read) I’m going to say that the official Chinese PMI will show an increase in August.

China manufacturing PMI seasonal

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USDA food CPI forecast too low

As Materials Risk reported in a recent article the surge in feed prices (corn, soybeans, wheat) could actually lead to a decline in meat prices as farmers look to offload their livestock as feed prices increase and pastureland deteriorates.

As Bloomberg report, in a bid to avoid higher feed costs US farmers are sending younger cattle to the slaughterhouse (high temperatures make it even more difficult for cattle to gain weight). In response the US Department of Agriculture (USDA) recently lowered its forecast for beef inflation at the shop for 2012 to 3.5%, from 4.5% previously.

However, according to Cargill the current cull is likely to lead to the smallest herd in 60 years, putting upward pressure on prices next year. The USDA’s latest estimate is for beef price inflation to reach 5% in 2013.

Given that beef CPI was as high as 10.2% as recent as 2011, under much more benign conditions the USDA’s forecast looks like it will be revised up significantly before the year is out.

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