This morning’s jobs data confirms that the U.S. economy is back to sort of healthy pre-financial crisis levels. While I am happy about the number I remain skeptical of our ability to reach escape velocity while the Fed takes its foot off the gas. For that to happen, the strengthening U.S. economy has to drag the rest of the world from its apparent malaise. It’s possible I guess.
As a trader this is what I am watching today:
Can U.S. equities hold? Up or down 50bps wouldn’t surprise me. Good news is probably good news for U.S. equity markets for now (at least ’til year end) despite the fact that today’s data should put a data dependent Fed that much closer to raising rates.
If today’s data does in fact suggest the Fed will need to raise rates sooner than expected can bonds yields actually rise? I suspect yields remain low as U.S. Treasuries will remain a “safe haven” asset for global investors. A rally in bonds today though would be the one thing that should scare the crap out of U.S. equity bulls.
In the face of yesterday’s commentary from the ECB I am hard pressed to see the U.S. dollar do anything else but to continue to rise against the Euro and the Yen.
And commodities. They can’t get out of their own way. They remind us that the U.S. economy ain’t exactly driving the train as it relates to global growth.
So ’til year end. I expect stocks to close near highs, bond yields near lows, dollar near highs, and industrial commodities near lows. Kind of confusing right? Well, I suspect we see some sort of dislocation in Q1 2015 as we did in Q1 2014. The cross currents remain prevalent, but I can’t remember the last time we have witnessed this sort of volatility in almost every major risk asset class in the world and equities have remained immune.
While I think it is silly to chase U.S. equities here, despite an improving economy, it is my view that current prices reflect this improvement and that the strong dollar will ultimately have adverse effect on corporate profits of U.S. multinationals. And commodity weakness is reflective of global demand and will have limited positive effects on household incomes and the benefits of lower input costs will not outweigh diminishing investments.
So what’s my trade? I suspect of all of the asset classes discussed above, TLT seems like the best own here. I know it sounds counter intuitive but (at least in Q1) I suspect we see a little global growth scare. If crude continues lower then I think TLT once again touches that October panic high.
Wednesday morning I decided to sum up what I am looking at (MorningWord 12/3/14: Global Weirding) globally and this remains my macro focus at the moment. And with this jobs number out the debate is even clearer:
The U.S. stands out in a sea of mediocre economies worldwide. Does the U.S. pull everyone up or does everyone else pull us down?