Wednesday, 18 July 2018

US recovery could be on a different planet, if you believe the Fed

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While NASA begins to navigate its Mars rover, Opportunity, in order to investigate a barely known planet, I ask myself how well we know the one we are on ourselves. By all accounts and based on the evidence, US stock markets and the Federal Reserve are certainly not on one and the same.

Anthony Peters, SwissInvest Strategist

Just one day after the S&P broke, albeit only in intra-day trading so far, its pre-Lehman level, the FOMC indicated that it was prepared to revive stimulus measures unless it sees signs of a sustainable rebound. Evidently it does not believe that what we are seeing now in terms of economic growth and increased employment is more than another blip.

These days it has become accepted that the more scary the Fed’s predictions become, the more stocks rally. Supposedly rational bond market operators who eat and breathe macroeconomics have always struggled to understand how equity geeks can get excited when the monetary authorities are holding their heads in their hands and racking their brains as to how to stop the economy from falling off the cliff.

During the Greenspan era, the US saw itself as the consumer of last resort and hence as the locomotive pulling the global economic train. As you will be aware, I am deeply conservative in how I interpret the interrelation between the demand and the supply spirals – I see them as something of a double helix – and was sceptical throughout the consumer boom of the assertion that consumption can endlessly drive growth.

That scepticism had me under-geared in the boom but then debt-free in the bust. Swings and roundabouts. Anyhow, it was interesting to note when breaking down the Japanese Merchandise Trade data yesterday that exports which have slowed to both China and Europe are growing again to the US. If the growth in consumption is faster than the growth in employment and productivity, we should know now to be very careful.

The US is at the beginning of what will no doubt become a very vicious and divisive presidential campaign. Both sides will be at each other’s throats and they will be arguing over everything other than the colour of the flag. However, both will promise that, if elected, the economic future for “hardworking American families”, in other words the broad middle class, will be nothing if not rosy. If there is one trait which distinguishes Americans from Europeans, it is their congenital optimism, their belief that things can only get better.

The Fed is telling us clearly that it is not happy with the immediate prospects for the global economy but Joe Sixpack is in no mood to listen, should the broadcast media even deem it necessary to tell him.

The last day and a half has seen the US 10-year note rally around 15bp back to 1.70%. This might be well north of the 1.39% lows we saw in late July but it is a lot further still from the 2.38% highs of March and is still below the 1.84% year to date average. This is not a bond market in the head-long sell-off in the face of sustainable recovery and imminent Fed tightening which the equity bulls have been predicting for the past three years.

In Europe all are preparing for the outcome of the grand meeting between that naughty but belligerent school boy, the headmistress and the deputy headmaster

One of the leading indicators for the US stock market has been, in the last few years at least, Caterpillar. This was the company which was going to benefit most from infrastructure spending as the driver of recovery. In fact you can overlay this year’s price chart for Cat’s stock with the 10-year bond yield and they look quite similar. At the moment it is certainly not a trailblazer but it is doing what the Fed is saying. Do I detect that the much vaunted recovery in the US might not be taking place on the shop floor but on the credit card again?

Alas, here in Europe all are preparing for the outcome of the grand meeting between that naughty but belligerent school boy, the headmistress and the deputy headmaster. In a world full of known unknowns and unknown unknowns, do we still have the ability to deal with known knowns?              

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