FORTUNE — As we advance through the presidential debate and move nearer to the November general election, the dismal state of the U.S. labor market will likely become an increasingly positive catalyst for the U.S. dollar as a result of it being a negative catalyst for President Obama and his weak dollar political agenda. We continue to anticipate slowing economic growth domestically over the intermediate term.
Friday’s news that the economy gained 69,000 jobs in May was an absolute disaster. Perhaps the greater disaster was the consensus expectation of a 150,000 gain. Global growth data and various market-based indicators have been sounding the alarm bells for literally three full months.
We find it critically important in an election year to dig into the employment statistics in order to handicap the presidential election odds – particularly given the potential for a political sea change and its impact on the dollar, which remains paramount as a leading indicator in our model for staying ahead of major asset price inflations and deflations globally.
The dollar currently is trending slightly stronger. To us, that is signaling some combination of a few key factors:
- No QE4 upgrade from the Federal Reserve in the immediate term;
- Mitt Romney is taking polling share from Obama, a proponent of monetary policy that augers heavily on U.S. currency debasement; and
- Europe imploding.
As it relates to point #1, it is our view that Fed chairman Ben Bernanke is handcuffed due to the political risk associated with pursuing an asset price inflation just ahead of or during the general election debate. A necessary ingredient of further monetary easing is likely fear-mongering. Will Obama support such dire messaging on the campaign trail? That’s an important question to debate at the current juncture, but in reality Obama probably needs to spin the economy as positively as possible.
In addition to this political headwind, the Fed’s own measure of inflation expectations remain fairly elevated relative to the last occurrences of QE, suggesting that there is more downside to come in asset prices before they can justify acting. Even still, the Federal Reserve defying reasonable expectations and jumping the gun with more “stimulus” is not an improbable scenario. Key upcoming catalysts on this front include Bernanke’s testimony to Congress on the U.S. economic outlook on Thursday, and the next rate decision on June 20.
To point #2, Romney’s gain in polling, we’re already seeing this show up in the data. On our own proprietary index, Obama’s odds of securing a reelection victory in November have fallen -720bps from their MAR 26 peak to 54.8%. This is coincident with Romney’s presidential odds on Intrade making higher-lows.
To point #3, Europe imploding, not much else needs to be added beyond Hedgeye’s consistent coverage of the ongoing crisis within the European Monetary Union. Rumors be what they may, our research analysts are hard-pressed to see the GOP signing off on providing the IMF with both consent and sufficient funding to bail out Spain – or any other country or financial institution for that matter. As recently as last month, Speaker of the House John Boehner (R-OH) was on CNBC firmly staking the Republican opposition to further bailouts, bazookas, etc. Furthermore, if Spain were going to be “saved” in the immediate term, you’d likely see it show up in various market-based leading indicators, which, as of now, is not the case.
As we advance through the presidential debate and nearer to the general election, the dismal state of the U.S. labor market will likely become an increasingly positive catalyst for the dollar. The unemployment rate ticked up to 8.2% in May. By our math, which accounts for dramatic shifts in the size of the Labor Force by using a 10-year average Labor Force Participation Rate (just above a 30-yr low of 63.8% in May), the May Hedgeye-Adjusted Unemployment Rate came in at 11.0%, which ticked down sequentially from last month’s 11.3% reading.
The following charts compare two “strong dollar” presidents vs. two “weak dollar” presidents in the context of reelection cycles. With the exception of the BLS headline number, President Obama’s employment scorecard improved, very marginally, month over month. That being said, the broader trend in each of our three metrics – which we feel is the “true” state of the US labor market – continues to track painfully in the wrong direction for the incumbent.
