Busch: What Jobs and Currencies Have in Common
There are two events that will generate most of the newsflow narrative for the week.
First and foremost, the US employment data at the end of the week will be the central focus. The expectations are for +80k private payrolls with the unemployment rate ticking up 0.1 to 9.7%. With the weekly jobless claims holding between a range of 450k to 480k, there isn’t a lot of optimism for strong payroll growth. As most know, the US economy needs between 120k and 150k of NFP just to keep the unemployment rate steady.
The lack of small business hiring is the critical aspect of why overall job growth remains subdued. The reasons vary from a lack of bank lending to a slew of new regulatory burdens to uncertainty over personal and business taxes. Small business (>100 workers) generated 2/3rds of the employment growth in the last expansion and employ over 50% of the US workforce. The dearth of hiring from this group underscores the limits of the Federal Reserve to stimulate via cheap money when those funds are not making their way to small firms.
The other major event this week will be the annual IMF-World Bank meetings in Washington, D.C.
The IMF will release their revised outlook for the global economy on October 6th and the meetings commence on October 8th.
The dominate discussion ahead and during these meetings will be competitive currency devaluations and whether emerging market economies can remain buoyant while the US economy remains below trend.
The competitive currency devaluations have been on the front burner for some time, but began to boil when the US House of Representatives passed a Chinese currency tariff bill last month. While the bill is unlikely to become law, the thrust of the argument is that China has unfairly kept its currency weak to stimulate their exports to the United States. Accompanying this, the US Federal Reserve has expressed strong interest in expanding their current quantitative easing program and the US dollar has devalued on the news. Given the link with the Chinese yuan, this has meant the Chinese have a more competitive position against their trading partners that have free floating currencies.
"The lack of small business hiring is the critical aspect of why overall job growth remains subdued."
Given the persistence of strong Chinese growth, the argument for an emerging markets decoupling from the United States is widespread in investment circles. On September 20th, Nobel laureate Joseph Stiglitz expressed the idea in a Bloomberg interview: "The world has already become partially decoupled." It’s difficult to argue with the facts on this as BRICs grew at the following rates in Q2 (Quantatative Easing): Brazil 8.0%, Russia 5.2%, India 8.8% and China 10.3%. The US grew at a paltry 1.6%.
The outcome of these themes will likely be a narrative of expanding global growth with a weak US perspective that leads to further "Risk-On" trading with a twist. The twist is that the US bond market continues to appreciate as rates stay soft. This twist started after NY Fed's Dudley laid out the argument for a QE2 program on September 8th. How long this contradictory movement can continue will be dependent on what the nonfarm payroll show on Friday.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.