‘No Brakes’ on U.S. Growth – But Are Americans on Board?

IMF Bullish on U.S. Economy – Americans Remain Cautious
“There are no brakes on U.S. growth,” said the IMF’s chief economist, “It’s an economy that is fundamentally robust.” The latest International Monetary Fund (IMF) forecast is for 3.6% global GDP in 2014. The U.S. is expected to grow 2.8%, the Eurozone 1.2%, Japan 1.4% and the UK 2.9%.

Indeed, U.S. labor market data signaled ongoing strength, as unemployment claims fell to 300k, the biggest week/week drop in 10 years and the lowest weekly number since May 2007. Seasonal factors (Easter) and normal data volatility may be at work, but it’s still a low number. The February JOLTs report was fine, considering the weather: the number of job openings and hires rose, the number of terminations was flat. The number of job openings is the highest since January 2008.

Meanwhile, consumer confidence remains below “good times” levels, according to the University of Michigan’s Consumer Confidence Index.

  • Credit card debt balances outstanding declined (again) in February. Student loan debt continued to rise.
  • Mortgage applications ticked up.
  • On the sunny side: the NFIB Business Confidence Survey has regained much of February’s decline.

FOMC Encouraged the Doves
The central message of the FOMC’s minutes and speeches was: “we don’t want the taper to be interpreted as a signal we’re preparing to tighten.” In other words, “we want yields on 2-5 year Treasuries to stay low.” Investors obliged – the yield on the 5-year Treasury ended the week 13 basis points (bps) lower (as the 10-yr fell 11 bps); the 2-yr yield fell 6 bps.

A hawk’s-eye view: Richard Fisher, Dallas Fed President, put quantitative easing (QE) into perspective by pointing out that, at the end of QE, (assuming the taper continues), the Fed will hold more than 40% of the mortgage backed securities market and almost 25% of outstanding Treasuries. QE has expanded excess reserves (ultra-high-powered money) 1,000-fold.

Japan Asserts ‘No Change’
On Monday, the Bank of Japan (BoJ) announced (as widely expected) that it would not change its policy stance. Still, the markets acted shocked. On Tuesday, BoJ Governor Kuroda said the Bank would not introduce additional stimulus anytime soon. The currency rose almost 2% against the dollar and the stock market suffered its biggest one-week loss since the Fukushima disaster, with the Nikkei loosing 7.3% for the week, closing below 14,000 for the first-time this year, and hitting a six-month low.

Comment: There had been some speculation that the BoJ might increase QE, but that didn’t seem to be the consensus view…so the market reaction seems extreme to me. As is the case with the Fed, the BoJ is not acting hawkish. It has said it would act if needed, but that it doesn’t see a need at this time, it expects the April 1 tax hike to cause only a temporary economic slowdown, and its longer-term outlook remains upbeat. Further, the Bank sees little unemployment or excess/slack capacity in the economy. The question, then, is: is the BoJ too optimistic? Time will tell…but it will probably take months for them to change their minds if they are.

China Data Suggests Softness
China moved to a trade surplus in March, but both exports and imports, which were expected to rise, declined. It’s unclear what portion of these declines reflects real economic weakness and how much is just changes in disguised capital/currency flows. Premier Li Keqiang and People’s Bank of China (PBoC) vice-governor Yi Gang said that the government would not respond to short-term economic volatility or growth below 7.5% with stimulus: the priority is on transitioning to a more market-driven economy.

  • Chinese PPI remained in deflation (-2.3% y/y) for the 25th consecutive month, suggesting there’s a lot of excess industrial capacity in China.
  • Chinese CPI inflation rose to 2.4% y/y, boosted by food prices. Inflation ex-food is lower.

The ECB Hinted at a More Activist Approach to Currency Policy
As we know, the European Central Bank (ECB) has not engaged in quantitative easing (and may be legally prohibited from doing so). In past comments, the ECB has increasingly mentioned the deflationary impact of a strong Euro. This past weekend, ECB Chair Mario Draghi raised the ante, saying: “A strengthening of the exchange rate requires further monetary stimulus. This is an important dimension for price stability.”

Comment: At the very least, this is a warning shot across the bows of those who are betting on Euro appreciation. Draghi and the ECB have used the “jawbone” very effectively in the past. Let’s see how markets react this time.

Last Week in the Capital Markets
It was “risk-off” in developed markets. “Risk-on” in emerging and frontier.

  • Currencies: The dollar declined 1-2% against the Yen and Euro. The Chinese Yuan ended the week roughly flat against the dollar. The market apparently interpreted recent Fed statements as incrementally dovish and Bank of Japan statements as hawkish.
  • Bonds: 10-year Treasury yields fell back to near their lowest levels of 2014 on a dovish reading of the FOMC minutes and a flight-to-safety (from equities) trade. High yield spreads rose 14 bps to 382 in a “risk-off” market.
  • Equities: The MSCI Emerging Markets and Frontier Markets indexes were up roughly 1% and 3% last week, but developed market indexes struggled. MSCI Japan was down 5% (for US$ based investors) as Yen appreciation offset some of the index’s 7% local-currency decline. MSCI Europe and the S&P 500 each returned about -2%. Within the S&P 500, defensive groups like Utilities, Consumer Staples, and Telecoms outperformed; Health Care and Financials were weakest.
  • Commodities: WTI oil was up about 2.5% on Ukraine fears and lower inventories. Gold was up about 1.5%.

Data Sources: The Wall Street Journal, Financial Times, Bloomberg.

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