Position: Long Germany (EWG), Long British Pound (FXB), bullish on EUR-USD; Short Italy (EWI)
Conclusion: We don’t see the US unemployment rate turning around materially anytime soon, which should contribute incrementally to USD weakness. German unemployment shows an entirely different slope, one we believe adds to the country’s bullish outlook.
Today Germany released its unemployment rate, which dropped 10bps versus the previous month to 7.5% in September. While we acknowledge that we’re not comparing apples to apples in looking at Germany’s unemployment rate versus the US’s (see chart below) we do have a few remarks on the implications of their utter divergences.
- Remember that Germany issued a $16 Billion subsidized part-time work program (Kurzarbeit) in the early part of 2009. By all accounts the chart would suggest the program helped to mute an upturn in the unemployment rate during the global recession. Conversely, the US unemployment rate ramped up through the Great Recession, and has a contributing factor in our call for a much lower GDP estimate than most on The Street for 2010 and 2011.
- As our Financials analyst and jobless claims guru Josh Steiner has demonstrated in his research, US jobless claims have yet to come down to the 375-400K range, a level that has been shown historically to encourage the unemployment rate to dip meaningfully.
- With consumer consumption comprising a larger percentage of GDP in the US versus Germany (~70% versus ~50%) and wage and salary inflation minimal over recent months in both countries, we believe the US economy will be more hostage to a higher unemployment rate.
We continue to contend that US unemployment rates in the 9-10% range should contribute to further erosion in the USD. One TRADE we think can work here is long EUR, short USD, despite the ongoing sovereign debt contagion threats across the Eurozone.