Macro: The Bottom Line (1/13/2014)

Welcome to 2014! This year certainly promises to be an exciting one, with the Fed managing a change in both its chairmanship and its policy focus, the Eurozone still treading water to avoid relapsing into recession, and the most challenging environment the emerging markets have seen in years. We'll be sure to keep you well-informed on these and other topics through the year.

Let's kick it off with the previous week's highlights.

US jobs data points to a still-uneven recovery: In one of the first high-impact data releases of the New Year, the Labor Department published its December employment report. At first glance, the figures were contradictory. On one hand, it showed the US unemployment rate falling from 7.0% to 6.7%; on the other, it reported that a mere 74,000 jobs were created in the month, well below the 200,000+ we've become used to seeing. This is a good illustration of why a singular focus on the unemployment rate can be misleading. The fall in unemployment was largely a consequence of workers dropping out of the labor forces, either because they're forced to settle for lower-paying p (@)art-time roles, or because they've become discouraged and/or and stopped looking for jobs. In fact, this has been a trend through 2013, with the labor force participation rate falling by nearly a full percentage point in the year to below 63%, the lowest in 35 years. In other words, only about 6 out of every 10 Americans is either satisfactorily employed or actively looking for a job. At a time when the country is grappling with mounting demographic challenges and Social Security costs, lower labor-force participation is not something to be welcomed by any means. What does this mean for your investments? The Yellen Fed will be no different from the Bernanke Fed, with ultra-low rates for years to come and further headwinds for the dollar. And importantly, there's still hope for gold and other commodities. 

ECB meeting - no change to our bearish view on the euro: The other high-relevance item on the economic docket last week was the European Central Bank's policy meeting. As you recall, we've been bearish on the euro for a couple of months now, arguing that with all the weaknesses still handicapping the Eurozone economy, there's no way the euro can stay as strong as it is. Well, the common currency is still trading north of 1.35 against the dollar, and the ECB again refrained from further easing last week. But this by no means changes our view! If you read into the fine print of ECB President Draghi's press conference comments, you'll note some pretty dovish language: e.g. [the ECB Governing Council] strongly emphasizes that it will maintain an accommodative stance on monetary policy for as long as necessary." Also, Draghi cited two "contingencies" that could prompt the ECB to do more: (1) "tightening of conditions in money markets" and (2) "a change in inflation expectations." Well, given how things are going, we can reasonably expect at least one of these contingencies to be met. First, there are abundant signs that liquidity conditions in the Eurozone are tightening - in fact, the rates European banks charge to one another experienced a noticeable spike in December. Second, with inflation stuck below 1%, it's hard to imagine forward expectations on inflation trending lower. Long story short - if the ECB is serious about freeing the Eurozone economy from some the shackles that are holding it back, it will need to undertake something soon.