Global markets will have a dump of US data this week. There will be the usual run of scheduled economic news plus there will be the clearance of part of the backlog from the government shutdown over the past few weeks.
The data will give a good guide to the momentum of the economy before it was impacted by the government shutdown and the economically damaging Republican threats over the US debt ceiling.
That will be all well and good, but the market is more likely than not to discount most of the data flow, as the more important economic news will be how the economy performed during the shutdown and how it will recover after the jolt from the political games.
In other words, the data that covers the period from around October when spending, investment, jobs and confidence were impacted by the shutdown and folly over the debt ceiling will be more important for markets and policy makers than the news this week. The possible exception is Tuesday when labour market data is released.
Of course, the bulk of the economic news for October and then November will not be published until December or January, which is an eternity away for markets. In the mean time, markets will continue to grapple with the start of a monetary policy tightening cycle. The fact that share prices are at record highs simply adds to the confusion about the growth momentum in the economy. Coincidentally, Congress next votes on the budget and debt ceiling in January and February next year. More political hijacking at this time just might crack the market’s current resolve to be positive.
A true read on the health of the US economy is unlikely to be obvious until well into the new year. This could mean more than usual volatility in the data and perhaps the market reaction and interpretation of that news.
For the Federal Reserve, like the markets, the data will be more difficult than usual to interpret because of the unknown economic effect of the political shenanigans. In these circumstances, the Fed is likely to be very cautious in its monetary policy deliberations and actions. An end to quantitative easing and the $US85 billion a month bond purchasing program, which looked assured a month or two ago, is now unlikely to be seriously considered until the new year.
This will especially be the case given that the shock to the economy and the data from the government shutdown was clearly negative.
What may have been genuinely weak data in the absence of the budget and debt ceiling problems will now be viewed with a degree of scepticism, with the caveat that the weak data was related to politics. The Fed and the markets will not be so sure whether the economy was genuinely soft or temporarily in a politically inspired air pocket.
Thankfully in Australia, the focus of the economy is getting further away from the US and more towards China and the rest of Asia. The strong Chinese GDP data on Friday was good news. It was a critical reason why the Australian dollar surged and is around US$0.97 this morning. The shattering of investor confidence in the US and the US dollar free-fall is another critical factor behind the Australian dollar's strength. The US dollar is heading to hell in a handbasket, and the Aussie dollar will benefit from the likely realignment of investment flows.
While the US economy and its markets will remain highly influential drivers Australia and the world, this influence will continue to fade. Developments in the eurozone and China continue to grow in importance and disinvestment away from US dollars will no doubt remain the key global trend over coming years.
According to the IMF, Eurozone GDP is bigger than the US. China is now over 50 per cent the size of the US and within 15 years, it is likely to overtake the US as the largest single economy in the world.
These facts alone suggest the US will continue to lose its importance in the global economy. The political silliness of recent weeks may speed up the process of the de-Americanisation of the global economy and markets. The data this week, while important in the short term, will be a distant memory as the US economic empire slowly loses ground.