CONCLUSION: As we advance through the presidential debate and nearer to the NOV general election, the dismal state of the US labor market will likely become an increasingly positive catalyst for the USD as a result of it being a negative catalyst for the incumbent and his Weak Dollar political agenda. Incremental easing out of the Fed remains a risk to our Strong Dollar thesis, though not one we see materializing in the immediate term.
As we wrote in the APR edition of this series:
“As it relates to our intermediate-term outlook for US growth, there isn’t much analysis we can add to this morning’s Jobs Report beyond what has been signaled via the red on your screens today. In short, we continue to anticipate slowing economic growth domestically over the intermediate term.”
To echo Keith’s comments on our Daily Morning Macro Call (email if you don’t yet have access) a +69k MoM gain in US Nonfarm Payrolls (SA) is an “absolute disaster”. Perhaps the greater disaster was the consensus expectation of a +150k gain. Global growth data and various market-based indicators have been slowing/sounding the alarm bells for literally three full months. The US is not decoupling. Refer to our APR 13 2Q12 Key Macro Themes presentation for a refresher on our thoughts here.
To access the replay podcast and the presentation materials, please copy/paste the following two links into the URL of your browser:
- PODCAST: https://app.hedgeye.com/feed_items/19596-q2-macro-themes
- SLIDES: http://docs.hedgeye.com/Q22012.pdf
As an aside, we find it critically important in an election year to dig into the employment statistics in order to handicap the presidential election odds – particularly given the potential for a political sea change and its impact on the USD, which remains paramount as a leading indicator in our model for helping our clients stay ahead of major asset price inflations/deflations globally.
The USD currently is in a Bullish Formation. To us, that is signaling some combination of a few key factors:
- No iQE4 upgrade in the immediate term;
- Romney taking polling share from Obama, a proponent of monetary policy that augers heavily on US currency debasement; and
- Europe imploding.
As it relates to point #1, it is our view that the Bernank is handcuffed in the immediate term due to the political risk associated with pursuing an asset price inflation just ahead of or during the general election debate. A necessary ingredient of further monetary easing is likely fear mongering. Will Obama support such dire messaging on the campaign trail? That’s an important question to debate at the current juncture, but in reality Obama probably needs to spin the economy as positively as possible.
In addition to this political headwind, the Fed’s own measure of inflation expectations remain fairly elevated relative to the last occurrences of QE; suggesting to us that there is more downside to come in asset prices before they can justify acting. Even still, as Keith pointed out on our morning call this AM, the Federal Reserve defying reasonable expectations and jumping the gun with more “stimulus” is not an improbable scenario. Key upcoming catalysts on this front include: JUN 5 – Chuck Evans speaks to money marketeers in NYC; JUN 7 – Bernanke testifies to Congress on the US economic outlook; and JUN 20 – FOMC Rate Decision.
To point #2, we’re already seeing this show up in the data. On our own proprietary index, Obama’s odds of securing a reelection victory in NOV have fallen -720bps from their MAR 26 peak to 54.8%. This is coincident with Romney’s presidential odds on Intrade making higher-lows. Slides 38-42 of the aforementioned slide deck walk through the implications of this phenomenon in greater detail.
To point #3, not much else needs to be added beyond Keith and Matt Hedrick’s consistent coverage of the ongoing crisis within the European Monetary Union. Rumors be what they may, but our research is are hard pressed to see the GOP signing off on providing the IMF with both consent and sufficient funding to bail out Spain – or any other country or financial institution for that matter. As recently as last month, Speaker Boehner (R-OH) was on CNBC firmly staking the Republican opposition to further bailouts, bazookas, etc. Furthermore, if Spain were going to be “saved” in the immediate term, you’d likely see it show up in various market based leading indicators, which, as of now, is not the case.
As we advance through the presidential debate and nearer to the NOV general election, the dismal state of the US labor market will likely become an increasingly positive catalyst for the USD as a result of it being a negative catalyst for the incumbent and his Weak Dollar political agenda. Incremental easing out of the Fed remains a risk to our Strong Dollar thesis, though not one we see materializing in the immediate term.
Jumping back to the MAY Jobs Report, in order to net out the effect of the now-infamous NSA Birth/Death Adjustment, we subtract the NSA B/D Adjustment from the NSA MoM NFP number and then take the YoY delta from that. On this metric, MAY registered a sequential acceleration from APR’s awful print:
Looking at the Unemployment Rate SA, the headline number ticked up to 8.2%. By our math, which accounts for dramatic shifts in the size of the Labor Force by using a 10yr average Labor Force Participation Rate (just above a 30yr low of 63.8% in MAY), the MAY Hedgeye-Adjusted Unemployment Rate came in at 11.0%, which ticked down sequentially from last month’s 11.3% reading:
The following four charts compare two Strong Dollar presidents vs. two Weak Dollar presidents in the context of reelection cycles. With the exception of the BLS headline number, President Obama’s employment scorecard improved, very marginally, MoM. That being said, the broader trend in each of our three metrics – which we feel is the “true” state of the US labor market – continues to track painfully in the wrong direction for the incumbent.
Lastly, the following table highlights the nominal and percentage amount of job creation that has occurred in the US economy under each president’s watch through an equivalent point in their respective terms. Through his 40thfull month in office, Obama has grown US employment by +0.1%. This is only lagged by Bush’s -0.9% growth through his 40th month in office.
Have a great weekend,