AC/DC is back
and we’re thrilled!
Using AC/DC as a leading indicator, we could see big
trouble ahead for the global economy - or maybe not.
1973: AC/DC form in Sydney,
Australia - Economy: Start of the oil
crisis, which saw the price quadruple
1980: AC/DC release breakthrough
album Back In Black - Economy: Inflation in UK
reaches 20% and unemployment nears 2 million
1990: AC/DC score comeback with
The Razor's Edge - Economy: Recession in UK
imminent
2008: AC/DC top UK album charts
- Economy: Biggest world
recession in decades looms
December
2014: AC/DC
release
their new album, Rock of Bust - Economy: ???
Shifting Expectations
The
dominate themes in last week’s trading were the continued drop in the price of
crude oil, the angst in the U.S. equity markets ahead of Q4 earnings season,
and the disappointing U.S. December jobs report. This caused investors looking
for yield to move from the negative and low yielding currencies to the high
yielders of the NZD and AUD. The yen moved higher as the carry trade unwound
due as nervous equity traders looked to peel back from equity positions.
Meanwhile the USD benefited from the weakness in CAD due to lower crude prices;
GBP due to evidence of slower growth; CHF due to efforts by the Swiss central
bank to maintain the EUR/CHF 1.20 peg; and euro due to more signals that the
ECB’s balance sheet will return to 2012 levels.
In last week’s
‘Weekly FX Update’ we stated the following: the dominant support behind the
rise in the USD continues to be the “divergence theme” – a U.S. economy growing
at a 4% clip and a central bank ready to deliver an interest rate hike by
mid-year, while additional stimulus is required in the rest of the world. The
USD turned in a mixed performance last week because the market’s collective
expectation on the timing of the Fed’s first interest rate hike near mid-year
has been put into question. The CME Group FedWatch tool shows a 52% chance of a
September rate hike which is down from the 57% chance it showed on Thursday,
the day before the jobs report was released.
http://video.cnbc.com/gallery/?video=3000344746
On the surface, the headline
jobs number looked good as over 252K jobs were created in the month of
December, more than the market’s 240K forecast. In addition, the previous two
months were also revised up by 50K. The unemployment rate fell from 5.8% to
5.6%, the lowest level since June 2008. Unfortunately, the 252K jobs was the
weakest monthly jobs growth since August and more importantly the data on wages
was a major disappointment. Average hourly earnings dropped 0.2%, which was not
only the first decline in more than 2 years but also the largest drop ever. The
year-over-year rate slumped to 1.7% and if this continues it will become a
major obstacle for the Fed.
One report does not make a trend so we will have to wait and
see how this plays out. The jobs report was enough to trigger profit taking on
long USD positions. The news flow in the week ahead will probably reinforce the
rethink about the king dollar thesis and spur a consolidative move in the USD.
U.S. consumer inflation, producer prices, retail sales, and the Beige Book
report are on the docket this week. With deflation being a dominate theme
worldwide we suspect that the U.S. economy is not immune to it so we do expect
consumer and producer prices reports to reflect weaker prices in the December
reports. Also worth considering are four speeches to be given by Fed speakers
this week. Lockhart and Kocherlakota are noted doves, Bullard is a centrist,
and Plosser is a hawk.
Historical Effects of Falling Oil Prices
On a year-over-year basis, the
price of oil has dropped over 35% a total of 7 times in the past 30 years. Out
of those 7 times, a recession followed the steep decline in prices a total of 3
times. However, each time there was a recession following a dramatic drop in
oil prices (September 1991, October 2001 and October 2008) the U.S. economy was
already in a recession or it was imminent.
The impact of oil prices on the U.S. energy sector is
obvious and the market has already marked the sector down by 25% by the end of
Q4 2014. The manufacturing sector, however, should accelerate heading into 2015
as output should intensify resulting from cheaper manufacturing costs. With the
energy sector factored in, overall capital spending should also increase. The
major risk to the U.S. economy and growth is inflation. The Fed is obviously
watching signs of inflation to determine when to raise interest rates. Once the
price of oil stabilizes and consumers realize savings on heating and
transportation, the result should demonstrate an increase in spending and,
therefore, rising demand. The fall in oil prices should add approximately $75
billion a year to spend on other goods for American consumers, which is about
0.7% of total U.S. consumption.
How far do you think oil will drop?
Share your thoughts with us in the comment section below.
