In the first post, we provided a broad overview of sentiment in the global investment ecosphere, from the perspective of a macro-focused investor – the type of market participant that could benefit by adding Hedgebook into their investing and hedging toolkit. The next two posts will focus on the monetary policies of the world’s largest economy, the United States.
In retrospect, 2012 was a good year for the United States: the economy had recovered from a mid-year lull in jobs growth, with the Unemployment Rate drop below 8% in the third quarter ahead of the presidential elections. While the jobs recovery has been rather meager, there have been some bright spots that are worth discussing as they have emerged as not only bright spots, but strengthening trends that could one day soon force the Federal Reserve to exit the market.
In the chart above, we highlight the U.S. Advance Retail Sales report amid the Change in Nonfarm Payrolls report for a very specific reason: nearly three-quarters of the world’s largest economy is driven by consumption; the Advance Retail Sales report is the best proxy data available. It’s very evident from the chart above that consumption trends have been leading employment – it led the upswing in jobs growth in early-2010, and once again in mid-2010, while the turn lower in mid-to-late-2011 was led by softer consumption once more. Needless to say, consumption is key for the U.S. economy to continue to grow.
The big question is: can consumption maintain the U.S. economy’s slow recovery? The evidence is there: consumer sentiment readings are near in at multi-month and multi-year highs; wages adjusted for inflation are increasing, meaning that workers have more money in their pocket; the savings rate among households is increasing; and the housing market is showing greater signs of recovery every single month.
We do believe that the U.S. economy will continue to trudge forward this year, albeit at a slow pace, in no small thanks to the Congress in place, whose lower house is always at odds with the Obama administration. Near-term budget cuts will weigh on growth, as they already have in the 4Q’12 (this will be covered in the next post). Assuming that politics don’t get in the way of economic growth, it’s very possible the Federal Reserve sticks to its recent rhetoric, and begins to wind-down its QE3 program at the end of the year. If the economy is strong enough, markets could withstand the liquidity drain. If there’s one instrument that could benefit from a smaller Fed balance sheet, it’s the U.S. Dollar.
This series of eight posts will focus on the major themes affecting currency markets. The third post in this series will continue to discuss the Federal Reserve and the U.S. Dollar.