It is of course employment report Friday in the United States. A day that has excessive interest in the financial markets notwithstanding that today’s numbers are inaccurate as they will be frequently revised and which by process of aggregation will fail to reveal some of the very important nuances of an increasingly divided U.S. economy.
The focus on today’s number from a monetary policy prospective is somewhat blunted by the fact that the Fed has other excuses for being behind the curve. Being behind the curve is my personal opinion.
Anyway, my opinion doesn’t seem to be shared by the Cleveland Fed President Loretta Mester who is also a hawkish voting member at the FOMC and who gave some interesting comments in a Wall Street Journal interview saying, “I don’t think that the Fed, in terms of the setting of monetary policy, is behind the curve. We do have time to assess conditions.”
She also added
, “I’ve been one of the more positive ones in terms of the outlook for the U.S. economy, and I continue to be positive about it. But I take on board that there is increased uncertainty, which could change officials’ expectations that the Fed’s short-term interest rate target will rise gradually over time.”
In simple words, it will be lower for longer.
But yes, Ms. Mester is right having concerns about weaker global aggregate demand from reduced UK and EU demand.
In this context, Moody’s just released an interesting report titled “EU Political Contagion Represents the Greatest Risk to Otherwise Muted Global Impact from Brexit,” wherein it says it expects UK growth to slow down to 1.5 percent in 2016 and 1.2 percent in 2017, from 1.8 percent and 2.1 percent previously, and growth in the Euro area to come down to 1.5 percent in 2016 and 1.3 percent for 2017, from 1.7 percent and 1.6 percent previously.
Long-term investors could do well paying attention that Moody’s also says the downside risks to global growth stem not from the possibility of a recession in the UK, but from the possibility that developments in the UK may give rise to increased political risk elsewhere in the EU and that in the long run, the potential strengthening of nationalistic and protectionist movements could have a detrimental effect on the EU, even threatening its existence.
That said, and coming back for a moment to today’s employment situation report is that it may, though very imperfectly, provide us with somewhat more information on the growing U.S. inflation problem, in particular about labor cost pressures and suggestions of a tight labor market, which all will be relevant.
Because of all that, today’s details of the report perhaps matter less as there is no suggestion whatsoever of an imminent Fed action.
What really matters is the trend direction and what that tells us about structural inflation pressures.
In the UK, and this is also important, consumer confidence has collapsed in the wake of the UK referendum according to GFK with the largest decline seen since the end of 1994. The GFK survey distinguishes between those voting remain and those voting leave. Both groups saw confidence decline, though those voting leave had less of a confidence decline.
Confidence normally overreacts to underlying economic events of course and that is something that the media contributes to.
However, many newspapers in the UK were in favor of exit and have not tended to emphasize the negative aftermath.
So, this is perhaps a signal of the role of social media which has been more negative in influencing sentiment in modern society.
Negative factors ahead in the UK include inflation, which is likely to have a disproportionate impact on the consumer and the labor market, which could be an offset, as job losses seem relatively unlikely, even if hiring stalls.
Yes, the world is changing rapidly and in part stealthy.
Therefore, sensible market participants are going to have to pay attention to more than economic numbers nowadays if they wish to properly assess financial markets risks, which will not be easy to do. You can be sure of that.
Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.
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