Big wheels keep on turnin’

Momentum is a hard thing to find nowadays but perhaps there are signs of life emerging.

I wrote earlier we would not get a big deviation from the estimated mean for non-farm payrolls and could not have been more wrong. Non – farm payrolls in the US just came in at 171k vs an estimate of 125k above the range of expectations, also previous data was revised upwards. This all signals better than expected growth in the private jobs market in the US and all but seals the deal for Obama in my mind.

In trying to take the data at face value this signals that the US has the momentum now in terms of their economy, the next few months will really indicate whether they are on track and hopefully prove some of the pessimists doubting the validity of the data wrong. Once the election and campaigning and “spin” is over and the dust settles things will really get interesting to see if they can keep their momentum rolling.

What this means for markets is more difficult to predict across the asset classes. But in short this is how it “should” play out:

Equity indices like the S&P500 should rally, will be tough job to take out the recent highs especially with the odd news bomb and talk of fiscal cliff but if the data were to keep improving like this you should see overall higher prices over the coming weeks and months.

Bond yields “should” rise as investors switch from low-returning assets into higher returning assets such as equities. I.e sell bonds and buy equities often called asset allocation. With interest projected to stay on hold till mid 2015 and signs of economic improvement it does not pay to have your money tied up in low yielding assets.

In currencies it gets more difficult, technically the US is outperforming Europe and therefore should rise in value against it, but investors still have to battle against the inflationary effects of Quantitative easing (QE) so difficult to forecast the Eurodollar but again if you take the data at face value the US is getting better while Europe is still declining.  Other currencies like the Australian dollar should improve as these are currencies that are usually highly geared to global GDP improving, so an improvement in the US should help with some recovery in China also thereby benefiting the economy of Australia. Currencies such as the Yen should weaken as those hiding in it will sell it and move to a higher yielding currency – (on the data we saw a big move in AUD/JPY higher).

Commodities gets interesting also, technically speaking with US GDP  improving oil should also strengthen and if the USD is improving gold should decline in value but this is a bit more murky as dollar strength often correlates to lower commodity prices so for oil it is a coin flip at the moment for me but in the end higher GDP and overall economic activity should win the day and drag it higher.

This is in theory how it should work but please dont take this as “investment advice” it is certainly not that, and today is not the day for it all to happen, but it is interesting to note the link between these economic data points and how it effects the markets and perhaps see there is some hope or optimism out there even if everything you read in the papers is usually gloomy.

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