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As the financial world emitted a collective groan when the June jobs data crossed the wires this morning, Lakshman Achuthan was calm, unmoved and not surprised. In fact, the co-founder of the Economic Cycle Research Institute says he's seen it coming for months.
"The economy is down-shifting...you can see in the jobs number that the sand is shifting," he says.
As a self-described business cycle expert, Achutan's analysis of data and leading indicators "is able to see through the noise" and allows him to make macro calls on the growth cycle. In fact just two months ago on our sister program The Daily Ticker he said "clearly, unambiguously we will see a global industrial slowdown this summer."
With so much riding on - and priced into - an economic and earnings rebound in the second-half of the year, Achutan not only pours water on that, but ups the ante by saying he cannot rule out slumping into another recession in 2012. "You have a 4/10ths rise in the unemployment rate over the last 3 months. That doesn't happen in an economy that is reviving or firming or gaining steam," he explains.
Further, Achutan says "It's a growth rate slowdown and that's what the market really cares about. Recessions and recoveries, that's old news."
So assume for a minute that Achutan is right (again) and that the growth rate just stumbles along at 1-2%, jobs growth doesn't materialize and the various Purchasing Managers Indexes stall. Achutan says that will have a devastating effect on earnings and stocks. "Profit growth is pro-cyclical, meaning it can't disconnect from the economy" he explains, adding that "you'll have profits. But if you're interested in if they're getting better or worse, it's going to be really tough for them to get better on a sustained basis in a growth rate cycle slowdown."
"I'd be surprised if the market really took off on a sustained basis against what the growth rate of the economy is," he says. "It's not transitory."
What do you think? Is this still just a "soft patch" or something more sinister?
Give us your feedback and comments below.
The U.S. dollar pared the overnight advance following a dismal employment report and the greenback may continue to trade heavy throughout the remainder of the day as the new development portrays a slowing recovery in the world’s largest economy.
Talking Points
- U.S. Dollar: NFP’s Disappoints, Consumer Credit On Tap
- Euro: All Eyes On EU Stress Test, 1.4000 In Sight
- British Pound: Sideways Price Action Ahead
The U.S. dollar pared the overnight advance following a dismal employment report and the greenback may continue to trade heavy throughout the remainder of the day as the new development portrays a slowing recovery in the world’s largest economy. U.S. Non-Farm Payrolls increased 18K in June following a revised 25K expansion in the previous month, and the protracted recovery in the labor market certainly instills a weakened outlook for future growth as households cope with slowing wage growth paired with higher prices. However, as the U.S. equity market opens lower, the shift away from risk-taking behavior could gather pace throughout the North American trade, and the U.S. dollar may regain its footing once U.S. traders come on-line as it benefits from safe-haven flows.
The Dow Jones-FXCM U.S. Dollar index(Ticker: USDollar) tumbled to a fresh daily low of 9596.10 following the release, but the decline could be short-lived as the gauge continues to trade within an upward trend. However, the ongoing weakness in the labor market could prompt the Federal Reserve to endorse its zero interest rate policy throughout the second-half of the year, and the central bank may pledge additional monetary stimulus in the coming months in order to stem the downside risks for growth. As Fed officials are scheduled to hold their annual Jackson Hole meeting in August, speculation for another round of quantitative easing are likely to resurface over the near-term, but the central bank will certainly face increased skepticism should it look to expand monetary policy further as the risk for inflation gathers pace. In turn, we may see the recent strength in the USD dissipate, and risk appetite may pick up in the days ahead if the Fed shows an increased willingness to expand its balance sheet further.
The Euro pared the overnight decline to 1.4206, but the single-currency may trade heavy in the following week as the economic outlook for the region remains clouded with high uncertainties. With the European Banking Authority scheduled to release the results of the more stringent commercial bank stress test on July 15, the outcome could weigh on the exchange rate should it highlight an increased need for excess capital, and the data could heighten fears surrounding the sovereign debt crisis as the risk for contagion intensifies. As European policy makers struggle to restore investor confidence, the near-term reversal in the EUR/USD is likely to gather pace over the near-term, and the European Central Bank may continue to soften its hawkish tone for future policy as the ongoing turmoil within the financial system dampens the fundamental outlook for the region. In turn, the euro-dollar looks poised to make another run at 1.4000 in the days ahead the pair could face a bearish break out over the near-term as price action continues to approach the apex of the descending triangle.
The British Pound pared the decline from earlier this week, with the exchange rate advancing to 1.6069 on Friday, and the GBP/USD may range-bound price action in the days ahead as market participants wait for the policy meeting minutes due out on July 20. However, as the economic docket for the following week is expected to show a slowing recovery in the U.K. paired with softening price growth, the developments are likely to spark a bearish reaction in the sterling, and the Bank of England may endorse its wait-and-see approach for the second-half of the year in an effort to balance the risks for the region. However, we may see a growing shift within the MPC as the ongoing weakness within the real economy dampens the outlook for inflation, and the more members of the committee may show an increased willingness to expand the asset purchase program beyond GBP 200B as the economic outlook remains clouded with high uncertainty. In turn, the consolidation in the exchange rate could be short-lived, and the GBP/USD could threaten the rebound from the end of January (1.5750) as interest rate expectations falter.
Related Articles: Weekly Currency Trading Forecast
To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com
FX Upcoming
Currency | GMT | EDT | Release | Expected | Prior | |
USD | 14:00 | 10:00 | Wholesale Inventories (MAY) | 0.6% | 0.8% | |
USD | 19:00 | 15:00 | Consumer Credit (MAY) | $4.250B | $6.247B |
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