Front and Centre

Februari 29, 2016 16:44


Stars and Stripes

America is front and centre this week on the global stage.The 2016 Oscars took place in Los Angeles on Sunday night against a backdrop of questions about inclusivity.Though few if any would surely deny Leonardo De Caprio his win as best actor.Inclusivity or the lack of it will also be a feature of two other major events this week, from the worlds of US politics and economic data.

Super Tuesday

The race for the white house gathers further momentum this week with Super Tuesday. A round of primary elections in 12 states and 1 territory. That could go a long way to determining who will win the Democratic and Republican Party nominations and in turn who has the best chance of becoming the next president of the United States.Donald Trump who leads the republican race has run a campaign based around rhetoric and controversial sound bites, rather than policy.Yet he has struck a chord with a large swathe of the US populace, who feel they have been left out during Barack Obamas two termsnas president.There is a certain amount of irony here because Mr Trump's campaign is anything but inclusive particularly where immigration and foreign relations are concerned.

The democratic campaign seems largely to be divided along two lines. A vote for Hillary Clinton could be seen as a vote for women's rights and by extensions other minorities. Whilst Bernie Sanders,the other democratic front runner, is seen as socialist who would seek to bring the "rich and powerful elites" in the US to heel.

The graphic shows the relative electoral positions of the leading candidates (source BBC /AP)

There are 595 republican delegate votes and 1004 democratic delegates available on Super Tuesday. Whilst no one candidate can win out right from here, they can certainly make substantial gains and perhaps force rivals out of the race.

Employment Situation

As the dust settles from Super Tuesday the markets attention will turn away from politics and back towards economics (at least in the short term) as we see Februarys Non-Farm Payrolls released on Friday.The Non-Farms will be preceded by the private sector ADP Employment report on Wednesday and by weekly jobless claims, on Thursday this week. Unemployment in the US has been falling consistently since late 2011,as we can see from the chart below and now stands at 4.9%.

US unemployment rate since January 2011

However as the economic recovery matures, job creation rates (which is what the Non–Farm Payrolls measure) may be slowing.We saw a major beat in December's Non–Farm number but that was attributed to short term seasonal hires. Whilst Januarys number fell well short of the 190k forecast, coming in at 151k.Analysts are once again predicting 190k new jobs for February but they do not expect the unemployment rate to change from its current level.

On the side lines

The Federal Reserve will be watching this week's data releases closely, not only the unemployment data but also the Chicago PMI, the Dallas Fed Manufacturing Survey, as well as two releases from the Institute of Supply Management. Regular readers will be aware that we believe these data rich Items have more significance over the longer term, as far as the US economy and markets concerned.Though they can often pass by unremarked on the day of release.The Non-Farms by contrast generate considerable interest on their release but their long term impact on the economy and markets is limited.

For the next few months it seems likely to us that the Fed will play a supporting role. Fed fund futures imply just a 12 % chance of a March rate rise and only a 22% for a rise in rates in April. In fact we must look all the way out to December 2016 before we find a probability for a rate rise, of more than 50%.

The level of positive economic surprises emanating from the USA has begun to pick up in closing days of February (see the dark blue line at the bottom of the chart below) but it remains to be seen whether or not this trend can continue and in doing so, drag the indicator back into positive territory.

The chart shows the economic surprise index for selected world economies. Based on data releases versus consensus forecasts.

By the weekend then we will have a much better idea of who the real players will be in the US presidential race and a firmer handle on just how well the US economy is performing, as we enter the last month of Q1 2016. Risk would seem to be back on the table or is at least being considered by the dinners.Who are sharpening their appetites and who have already been served a canape of monetary easing by the Chinese Central Bank.Which announced a cut in its reserve requirement ratio aimed at allowing banks to lend more money and stimulate the Chinese economy.

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