Markets at a Crossroads
As global equity markets draw back substantially from recent highs and government data around the globe disappoints, investors look critically at upcoming United States job reports for an indication of global economic prospects. Analysts around the world have increasingly looked to a US recovery to power the next leg of economic growth as the Chinese economy continues to cool and Europe remains mired in steep recession. With decision makers at the Federal Reserve setting specific targets for unemployment numbers, job creation appears to be the clearest bell weather for near-future growth and market prospects.
In this environment, market participants are unsure whether the sustained central bank policy maneuvers around the globe will result in i) a real growth handoff to fundamentally driven economic expansion or ii) if stagnant slow growth is here to stay. As leading bond investor Dr. Mohamend El-Erian wrote in a recent blog post on the Financial Times, “The next 3-4 U.S. monthly employment reports will have a big say on how the majority view evolves from here.”
Summertime for US Jobs?
Based on HedgeSPA’s analysis of the market synthesized with Dr. El-Erian’s commentary, we see the following possible outcomes based on US jobs numbers this summer:
1. Slowing Payroll Expansion – Weak jobs numbers through the summer (<100,000 monthly average) cast serious doubts on the strength of the United States economic recovery. Disappointing growth numbers would lead financial markets to doubt the ability of current quantitative easing to deliver real growth, though some would undoubtedly call for more dramatic policy actions.
A series of weak numbers speeds up the rotation out of equities and back into the relative safe havens of government bonds and real assets. The Federal Reserve will continue its asset purchases within the foreseeable future. 10 Year treasury yields drop back below 2.00 while the price of gold begins to rebound from its spring slump with Governments “printing” more money. The dollar weakens within a reasonable trading range as optimism about a US-led recovery turns to pessimism.
2. Uncertain Middle Road – Though financial markets continue to look for a clear indicator of economic growth from US jobs numbers, fluctuating middling growth (between 125,000 and 200,000 on average per month) leaves investors uncertain about the strength of the economic recovery. While the US economy continues to grow, the pace of payroll expansion falls short of that needed to spark changes in Fed policies or inspire confidence in the strength of the recovery.
In the absence of a clear indicator on the United States economy, investors continue to fret about the future. Uncertainty exerts continuing pressure on QE-inflated asset prices and slowly weighs on US equities and the dollar. Markets don’t take make a sharp move down, but at the same time there is little optimism they might regain recent highs.
3. Sustained Job Growth – A series of strong job numbers throughout the late spring (>200,000 monthly average) and early summer months would demonstrate the United States economic recovery is on solid footing. Strong equity market performance and decreased unemployment may push the Federal Reserve to push ahead with slowing asset purchases and more seriously explore unwinding the QE-expanded balance sheet. The smooth growth handoff from monetary policy to fundamental drivers of economic expansion in the United States begins to power increased growth in international markets as well.
These positive fundamental signals inspire investors to push equity markets higher domestically and abroad. Market anticipation of Fed action begins to push bond yields meaningfully higher. Fundamentally-driven growth strengthens the US dollar and investors pull further back from gold’s early 2013 highs.
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HedgeSPA Research Team – 7 June, 2013