You'd never know it from the soaring indicators of U.S. consumer and small business confidence, but 2015 has gotten off to a rough start.
The Dow Jones Industrial Average is down more than 3 percent from its pre-Christmas high. The December retail sales report was a bit of a bummer, suggesting the collapse in energy prices hasn't yet given consumers the lift everyone thought it would. The fourth-quarter earnings season has a bit of a downer too, with big banks disappointing on FICC (fixed income, currency and commodities) revenue as we await energy sector results at the end of the month.
Also, currency market volatility is ramping up in a way that we haven't seen in years, as central bankers, pressured by the buildup of imbalances and the threat of deflation, start breaking ranks. We’ve seen evidence of that in the Swiss National Bank’s shocking move to end its pegging of the franc to the euro and a surprise rate cut by the Bank of Canada. Emerging market countries — especially commodity producers — have watched their currencies suffer dangerous declines. Russia and Brazil recently raised rates to try to prevent even steeper falls.
Folks don't seem to care.
The University of Michigan's Consumer Sentiment Measure is going vertical, rising to its highest level in 11 years. Outside of a quick burst of happiness in 2004, we're hitting levels that really haven't been seen since the dotcom euphoria of the late 1990s. It was a period that, like know, was spiked with foreign currency and bond crunches, calls of market bubbles, energy price declines and a corporate earnings recession in 1998.
The late 1990s parallels suggest that maybe U.S. consumers aren't off their rockers, but are accurately forecasting a turnaround in their fortunes, given the strong job gains and rapidly dropping unemployment rate we’ve seen over the last year, and an acceleration in wage gains seemingly just around the corner. The late 1990s example proves that this can come in the midst of global economic turbulence, earnings pressure and a Federal Reserve steadily tightening its policy stance.
The team of economists at Cornerstone Macro, led by veteran Nancy Lazar, notes that the U.S. consumer is actively benefiting from the turmoil happening in Asia and Europe.
OPEC's price war, and reduced overseas demand for goods, are lowering energy and commodity prices and thus boosting inflation-adjusted incomes in the U.S. Deflation fears in Europe, and the associated collapse in long-term government bond yields (with creditor Eurozone countries seeing their 5-year yields drop into negative territory), is boosting the housing market by lowering U.S. mortgage rates.
Even the stock market's oscillations don't seem to be having an impact: The University of Michigan's "favorable news" survey indicates that job gains and lower prices at the pump are more important issues.
No surprise then that U.S. business confidence, despite all the headwinds and the specter of higher labor costs as the job market continues to tighten, as risen to a 9-year high.
To be sure, this is offsetting a lot of bad news around the world that seems ready to get worse. Chinese real GDP growth slowed to its weakest in 24 years. Brazilian industrial confidence is breaking to the downside. Russian foreign exchange reserves are at an 8-year low. Japanese bank shares are dropping hard. And here at home, the Fed seems committed to raising rates for the first time since 2006 sometime around June — potentially upending the corporate bond market.
As long as job gains continue, and the wage gains we've been waiting for materialize, than the "decoupling" of U.S. consumer confidence from pretty much everything else should continue.
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