Joe Biden wanted to talk stats yesterday. So let me give you some stats about the US economy for last year, too.

3.3% growth in the final quarter – whoo yeah USA!!

$2.581 trillion in new govt debt last year – interest payments now top $1tn …oops! Well it’s fiscal largesse to boost productivity and infrastructure, not layering on debt for future generations!!

25 states have signed a letter pledging their support to Texas and its constitutional right to defending the Southern Border. Bidenomics and radical leftist social policies come at a YUGE cost.

Still markets don’t seem to give a damn, the S&P 500 rose for a sixth day on Thursday and a fresh record high. Markets are agnostic, but are they ignoring some major tail risks right now? The extreme tail risk right now is some kind of secession crisis between states like Texas and DC, and it looks less unlikely now than at any time since the Civil War. That is not to say it is ‘likely’, it is not, but it is not impossible and becomes more imaginable by the day.

US data was very strong – GDP at 3.3% in the final quarter vs 2.0% expected. Consumer spending remains very robust and government spending too – huge increase in debt last year of $2.5tn is hardly something that can be brushed aside as mere details.

GDP: ticking along on a debt train

So that headline growth number looks great, right? Here’s the Bureau of Economic Analysis (BEA) explaining that “the increase in the fourth quarter primarily reflected increases in consumer spending and exports. Imports, which are a subtraction in the calculation of GDP, increased.” But it slowed from Q3, here is the BEA again noting “slowdowns in inventory investment, federal government spending, housing investment, and consumer spending. Imports decelerated.” We could expect Q1 ’24 to be weaker – inventories and trade are starting to act as headwinds.

And what was the driver of this splendid, albeit slightly slower, growth? BEA: “The increase in consumer spending reflected increases in services (led by health care) and goods (led by recreational goods and vehicles).”

And all those jobs, what about all the jobs that Biden has created? Let me show you two charts (I couldn’t overlay the two sets using Fed Reserve’s Economic Data for some reason, but take a gander)

Exhibit A: native born workers – fewer jobs since 2019

Exhibit B: Foreign born workers – lots more jobs since 2019

Meanwhile the Fed can look on with satisfaction to the inflation numbers the year ended with two quarters of core PCE inflation at an annualized rate of 2.0%, though over the year of course it was higher. Excluding food and energy prices, the PCE price index increased 4.1% in 2023, compared with an increase of 5.2% in 2022. But that second straight annualised 2.0% on the core PCE deflator is BIG – the Fed can say it’s guided the ship to a soft landing – its worry is what happens when it cuts; does inflation reaccelerate or has it done enough already?

2% ahoy – but the more accurate monthly figure is today and could start to get lumpy. The Fed will want to be absolutely certain of it before it starts cutting, which for some risks being too tight on the way out.

ECB – everything on ice…but a March pivot may be coming. All policy rates remain on hold and the statement offered no clues about future policy moves. It was almost identical in content to the December statement. Markets are barely pricing in a move this spring – summer seems much more likely given the comments from Christine Lagarde and the uptick in inflation data in December. This meeting was always going to be a bit of a placeholder, but it did confirm that the ECB wants to be as data dependent as possible. On that front, unless inflation drops to 2%, the ECB may remain on hold for as long as needed. The statement retained the line that “policy rates will be set at sufficiently restrictive levels for as long as necessary”.

But the presser from Lagarde and some hot US data did nudge things for EURUSD. Immediately after the press conference traders moved to price in 50bps of cuts by June 2024, and 140bps of cust by year-end from 130bps before the statement. That seemed to be on her failure to rule out a March cut…but that is the point of being data-dependent I suppose; you cannot rule anything out really. Bear in mind the move was within the range of the prior two days in the region of 1.0860-1.090…hardly major ructions.

And…sources were out on the wires after the meeting to say that the ECB is open to changing its tune – if not policy rates – in March. Lagarde though had stressed it was still too early to discuss rate cuts this year – what are they trying to get us to think? All told, it doesn’t alter my belief that the first cut is likely to be in June. But a change is coming – that could be good for German consumer sentiment, which plunged to -29.7 going into February 2024.

All opinions, news, research, analysis, prices or other information is provided as general market commentary and not as investment advice and all potential results discussed are not guaranteed to be achieved. The information may have been derived from publicly available sources, company reports, personal research, or surveys. Past performance is not indicative of future performance. Trading carries risk of capital loss. Service available to professional clients only.