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Yesterday at Bloomberg we got the chance to meet David Woo, BofA/ML’s brilliant strategist for Global FX and rates.
The focus of our segment was on the Japanese yen, but off camera Woo had some interesting thoughts on the US economic situation, and why we’re about to approach what he calls a ‘moment of truth.’
He noted to us that there’s been a growing divergence between the S&P 500 and consumer sentiment, and that it may be the case that the expiry of the payroll tax hike is going to have a meaningful effect on spending. This phenomenon, he noted, might not show up for a little while, because it could take time for people to realise that their paychecks have been hit. Some people who only get paid at the end of the month may have not even had the opportunity to digest or assess the new reality, as of the time of recent data.
He mentioned, for example, that when the payroll tax cut first went into effect in early 2011, it took a while for people to react and for spending to rise. These things have a lagged effect.
But all that’s coming to a head.
In a followup email today he writes:
“The divergence between buoyant risky assets and sagging US consumer confidence since October has reached a point that a resolution is now both necessary and inevitable. The catalyst or the moment of truth may be the approaching sequestration crisis. In our view, the market is too complacent about the risk of a full implementation of the sequestration that will lead to a sharp slowdown in consumer spending in the months ahead. We expect both the USD and Treasuries to outperform in Feb/Mar.”
The sequestration (spending cuts) is due to come into effect on March 1. In the meantime, consumers will see more of their (lowered) payrolls.
The moment of truth approaches.