US economy gains momentum - but don't expect the Fed to rush to the exits on stimulus
Update on the Euro and Yen
US economy gains momentum - but don't expect the Fed to rush to the exits on stimulus: This
week must have been a welcome respite for President Obama after being
slammed for several weeks for the Healthcare.gov debacle. Through the
week, it appeared that the positive economic data flow just wouldn't
stop: (1) very strong new home sales data, (2) an upward revision to 3rd
quarter GDP growth to 3.6% annualized, and (3) a jobs report showing
>200K jobs created in November and a drop in the unemployment rate to
7%. Positive developments indeed. But are they enough to send the Fed
to the exits on stimulus? Definitely not! For one, while the 3rd quarter
headline GDP number was impressive, half of the growth was driven by companies stockpiling inventory. Actual consumption growth, on the other hand, was revised down to below 2%. So in other words, the strong growth we saw largely had to do with optimism about future consumer
activity, not necessarily about the present. Should holiday season
sales disappoint, companies could be left with an overhang of inventory,
dampening the outlook for the 4th quarter. Beyond the details of what
drove growth in the 3rd quarter, the broader issue with the US economy
is that businesses are investing less than before in fixed assets and
equipment. Investment in equipment actually fell in the 3rd quarter. Why does this matter? Because business investment is crucial to raising the efficiency of each worker - productivity in
economist-speak - which in turn allows for sustained wage growth. With
both business investment and productivity growth both showing signs of
slowing, a Fed exit at the moment risks hobbling the recovery just when
it appears to be gaining momentum. Bottom line: the recent data is encouraging, but the era of money-printing is far from over.
Last
week, we discussed why the Euro and the Yen are both subject to
weakness in the near future. Here's an update on the two currencies:
- Euro - don't be daunted by last week's bounce: Yes, it's true that the Euro jumped past the 1.37 mark versus the Dollar last week. But this changes nothing in terms of the overall outlook for the two currencies. First, while we don't see an end to Fed printing anytime soon, the FOMC will very likely taper the pace of its stimulus within the coming months, which will be supportive for the Dollar in the near term. What about on the ECB side? Well, they temporarily abstained from implementing any of the new measures under discussion (new long-term loans to banks, direct asset purchases, negative deposit rates). But does needing more time for discussion mean that they won't implement these measures in the future. We don't think so. With the Euro area economy barely managing a 0.1% growth rate in the 3rd quarter, and inflation still below 1%, we strongly believe that the ECB will have to resort to more stimulus.
- Yen - now at 103 to the Dollar: In contrast, the Yen did move in line with our expectations last week, weakening to 103 versus the Dollar. Despite all the optimism surrounding Japan's hyper-active policy mix, recent data suggests that the results have been mixed at best. Just today, Japan's 3rd quarter GDP growth was revised down to 1.1% (a meaningful slowdown from the 3%+ growth we saw in the 2nd quarter). At the same time, exports haven't recovered enough to allow Japan to return to a trade surplus. In short, if things don't start picking up soon, expect further stimulus talk - and more Yen weakness.
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