Australian travellers got some good news this week and it came with the Oz dollar sneaking back into the 90 US cents region. News reports said it was linked to, wait for it, bad jobs news in the USA, where 74,000 jobs showed up rather than the expected 200,000! And if this reasoning is sound, it could derail my generally positive attitude towards our economy and my moderately bullish take on the stock market, where I think the S&P/ASX 200 index should crack the 6000-level over 2014.
What? You must be thinking. How could a crumby unemployment story in the States hit our dollar and potentially wreck our expected improving outlook for the year ahead?
Well, for starters, it wasn’t a crumby unemployment story, it was a bad employment story. Actually, unemployment fell from 7% to 6.7% and so we should be cheering, but it came about mainly because despondent Yanks stopped looking for work. It’s called a falling participation rate and it’s generally not seen as a good sign for economic growth.
And it’s economic growth we need in the USA for a whole pile of reasons.
The latest growth number there was a ripper with a 3.6% result ramped up to 4.1%, and that really was good for the USA and great for world growth. It coincides with better growth stories coming out of Japan and even Europe and it has led to the IMF telling us that it will upgrade its global growth story.
Last week the world’s top monetary body said it would push growth up but as yet it has not told us by what. Recently they reported 2013’s 2.9% growth would be bettered in 2014 to the tune of 3.6% and when the world grows more strongly, it’s good for export demand and this should be good for Australian exporters.
Higher world demand with a lower currency here is like a double-barrel benefit and would provide more boost to our economy, which is really starting to miss the investment from the mining boom.
Generally the lower dollar, which experts say could sink as low as 80 US cents, along with the lower interest rates we see here now, would help key industries such as retail, education, tourism, manufacturing and housing to create jobs and get our growth rate over 3%. We need growth over 3% to see unemployment fall, so you must be starting to see why the Oz dollar’s level is critical.
But you might not get why a bad jobs number in the USA could help boost the Oz dollar, so let me explain that one and look at the likely longer-run consequences.
If the Yanks had created the 196,000 jobs in December that the experts predicted on the Reuters survey, then on top of the 4.1% economic growth number we would have expected the US central bank (Federal Reserve) to start tapering back its QE3 bond buying. This pumps up the US money supply and keeps interest rates low but they might have tapered quicker than expected if the jobs number was better.
A quicker taper would have meant US interest rates would’ve risen quicker and the greenback would also have increased at a faster rate. However, only 74,000 jobs were allegedly created and so the reverse logic applies. That is, a slower increase in jobs means a slower tapering and a slower rise in US interest rates, and all of this has pushed our Aussie dollar up.
Bad news or good news?
So is this really bad news for our 2014 outlook? My guess is no because I do not trust that 74,000 figure for US jobs. Back in November, the statistician over there corrected his first number of 200,000 to 240,000 and so he is used to big misses.
“It’s certainly disappointing, but I don’t think it’s indicative of what’s going on in the economy,” said Gus Faucher, senior economist at PNC Financial Services Group in the USA. Gus expects a revision and so do I, given other economic data out there for the US.
Also not helping the Oz dollar has been the recent rise in local home lending, which was up 1.7% in November for an annual rise of 24.5%. And given the Reserve Bank is watching the housing sector for any real signs of a bubble, it makes it very hard for further interest rate cuts. More cuts would help the dollar fall but the smarties in the forex markets know our central bank’s hands are tied and so they have forced our currency higher.
So, what lies ahead? A slower economy on a higher dollar and a worse than expected stock market?
It could happen like this if the dollar remains in the 90 US cents region and so we’re in the hands of the US economy, and that’s what I will be watching like a Labrador focused on a sausage at a family barbecue. I want the US economy to toss me some really tasty statistics, which will make the forex market drive the greenback up and the Aussie dollar down.
As someone going overseas in mid-2014, I can’t believe I’m saying this, but the fate of our economy is even more important than what I will pay for a Peroni in Italy. And what I lose as a tourist, I will more than make up on the stock market!
Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds. www.switzersuperreport.com.au