In a week where the FOMC meet (Friday morning 0230 AEST), the softer US payrolls on Friday has intensified discussion about whether we get QE3 at the upcoming meeting. My view hasn’t changed after the result, and in fact I don’t think the number was all that relevant for the Fed. That’s because they told us that no matter what, more stimulus was coming. Substantial and sustained. They were the words they used to signal to the market that QE was a done deal regardless. So for instance, even if jobs growth was strong, they’d simply say it wasn’t going to be sustained and still make the case to print.
The timing of QE3 doesn’t really matter to be honest, but I still think they’ll want to wait till the end of year fiscal cliff theatrics. That is, unless they are planning a turbo boost around the theatrics, which is plausible. So maybe they announce QE3 lite this week and then add to it later – or just announce an open-ended QE, as some on the FOMC want. Who knows, it’s a guessing game in the end. There’s just no pressure to do it yet though, I don’t see the urgency from their perspective. Operation Twist is still in, well, operation – US equities are at their highest in years and even the housing market is picking up. It would be a bit of a waste then.
Indeed those jobs numbers weren’t even that weak truth be told. In fact, it was the strongest August payroll in about six years (not that you’d read about that of course) and actually above the five-year pre-GFC average. It’s an okay number then. I hesitate to say good, but the facts are it’s not bad. To date, over 1.1 million jobs have been created this year – an average of almost 140,000 per month. That is roughly the same as last year, for the same period and just above the five-year pre-GFC average of 130,000 – you know, the boom years.
Given that fact, when people say jobs growth isn’t strong enough I’m not sure how they come to that conclusion. Jobs growth is still consistent with at least trend GDP growth. And GDP is at trend (roughly 2.5 per cent) looking though the quarter-on-quarter volatility. This is what the ISM manufacturing index is telling us. The services ISM is actually telling us growth is a little above trend. Those are the facts and all the major data is consistent. Why is the unemployment rate so high then? Because over 8 million jobs were lost during the slump – the bulk of those after the Fed sparked the financial crisis when it allowed Lehman to collapse.
We also got a batch of Chinese data yesterday and the press and commentary on it was very negative. Excessively so. Chinese growth is slowing/has slowed – that’s a fact. But this has been a deliberate policy goal and people appear confused as to what a slowing actually means. The sense of foreboding isn’t helped when alarmist words like ‘contracting’ appear, usually after the PMIs have been released and which stand below 50. Yet China’s economy is not contracting, far from it. Industrial production growth might be at its weakest in three years but it still grew 8.9 per cent compared to August last year. Year-to-date growth is over 10 per cent. Look at those numbers and then think about what it means. China’s industrial sector is 10 per cent bigger than what it was at the same time last year. Yes, 10 per cent! Consumer spending is about 13 per cent higher – and there are, what, 1.3 billion of them. That’s the beautiful thing about China – even when growth is ‘slow’ it’s still very strong.
Unfortunately all of this is overlooked when it comes to any analysis of the global economy – which hasn’t been sensible for a very long time. The consensus is much more pessimistic, but then it has been for years. I’d simply note (and you have to if you are going to be genuine in forming an opinion) the terrible track record this line of thinking has had. It's been truly terrible.
The market implications are hard to determine. On Friday there was a modest risk bid on the QE view and then China’s ongoing strong growth, even during a slowdown, is likely to embolden value buyers. There’s even talk China may stimulate growth further, although the lift in inflation may put that on hold. So it's too hard to call. Suffice to say that economic data this weak won’t offer a lot of view changing guidance.
For Australia it all about confidence (business confidence on Tuesday at 1130 AEST and consumer confidence Wednesday at 1030 AEST) and the fact that the interest rate cut call is out again will probably act to destroy any confidence boosting impact strong growth has had. Recall that every time the RBA has cut rates so far, confidence has declined. Why? Because it adds credence to all of the persistent hysteria over a domestic slump or recession. The country sees strong data, a bunch of wags come out and tell you that strong growth and low unemployment actually means the economy is weak and that its not going to last, as they have said every year for four years or more. The RBA cuts, people think something must actually be wrong then – and so it goes. Otherwise we just get housing finance data today and lending data on Tuesday (both at 1130 AEST), and of course we know lending growth has actually deteriorated since the RBA cut rates, which confirms my view.
Looking abroad there are a few pieces of decent data including US consumer credit, trade numbers Tuesday. On Wednesday we see the final estimate of German consumer prices and eurozone industrial production. Thursday sees US producer prices and initial jobless claims and of course as mentioned, on Friday morning we get the FOMC decision. Finally Friday night is a busy one for US data with consumer prices for August, retail sales, industrial production, Michigan Unis preliminary estimate of consumer confidence for September – and business inventories.
The German constitutional courts also rules on the ESM this week, but if memory serves the people bringing this case are the same ones who challenge everything to do with the eurozone, and in fact I think they even challenged Germany’s entry into the zone itself.
That’s the lot, hope you have a great week…