4 trading themes for 2023: #1 Never underestimate the spending power of the US consumer

In the US, the Fed isn’t really capable of direct-to-consumer pain so the avenue for dampening demand is through businesses and indirectly to consumers via layoffs or job insecurity. But that’s competing with excess savings that still aren’t exhausted.

The main risk I see is that the US consumer stays strong and the global marginal consumer taps out. That could end up being a goldilocks scenario for the US economy where global demand comes down enough to halt US inflation even with America staying strong.

What’s going to be particularly frustrating for AUD, CAD, NZD longs is that this will all happen with global growth staying strong — breaking a multi-decade correlation. China will strengthen this year and the US will surprise — helping commodity markets but not the commodity currencies because domestic markets will be soft and those central banks will be cutting rates.

Where it will get particularly tough is later in the year when the commodity bloc faces struggling economies and falling currencies. That will leave central banks with the devilish choice of cutting rates and further hurting the domestic currency — risking imported inflation. I don’t have a great deal of confidence that they’ll get it right but the right move will be to cut rates anyway.

The good news is that once the housing and rate differential trade washes out in late 2023 or 2024, the commodity currencies will be rescued by a bull market in resources. Wise long term investors will be using depressed AUD, CAD and NZD to buy up resource companies and projects.

How will I know if I’m wrong?

What I’ll be watching most carefully is US consumer spending and then US jobs market. Corporate reports on the US consumer over the holidays are perilous and often contradictory. In addition, the US storms just before/after Christmas could skew the picture this year further.

But I believe that so long as the US jobs market holds up, the US consumer will as well. So the single most-important data point this year may be weekly initial jobless claims
Jobless Claims

Jobless claims are a weekly statistic reported in the United States that represents a key barometer for domestic employment. As one of the most closely watched US indicators, jobless claims carry a lot of weight in financial markets, namely forex and the stock market.Jobless claims are reported on a weekly basis by the Department of Labor. While painting a picture of the overall health of the economy, jobless claims can be broken down into two types.This includes initial jobless claims or persons filing for unemployment for the first time. Additionally, this also entails continuing jobless claims, indicating unemployed people who have been receiving unemployment benefits previously.Why Jobless Claims Data Matters in ForexJobless claims can give an important snapshot of the US economy, which has impactful consequences on the US dollar. During times of economic stress, a surge in jobless claims is likely to signal the US economy is performing badly. This was on full display in early 2020 due to the outbreak of Covid-19.Such scenarios reduce risk appetite by investors who traditionally look to the US economy for broader signals. History is full of examples of both expanding and contracting labor markets.By extension, reduced jobless claims traditionally is seen as a strength that can power recoveries or rallies in US markets.It should be noted that initial jobless claims and continuing jobless claims often do not yield the same market impact.This is due to the fact that initial jobless claims measure emerging unemployment, which are released one week before continuing jobless claims. As such, the initial claims typically have a higher impact on the markets.

Jobless claims are a weekly statistic reported in the United States that represents a key barometer for domestic employment. As one of the most closely watched US indicators, jobless claims carry a lot of weight in financial markets, namely forex and the stock market.Jobless claims are reported on a weekly basis by the Department of Labor. While painting a picture of the overall health of the economy, jobless claims can be broken down into two types.This includes initial jobless claims or persons filing for unemployment for the first time. Additionally, this also entails continuing jobless claims, indicating unemployed people who have been receiving unemployment benefits previously.Why Jobless Claims Data Matters in ForexJobless claims can give an important snapshot of the US economy, which has impactful consequences on the US dollar. During times of economic stress, a surge in jobless claims is likely to signal the US economy is performing badly. This was on full display in early 2020 due to the outbreak of Covid-19.Such scenarios reduce risk appetite by investors who traditionally look to the US economy for broader signals. History is full of examples of both expanding and contracting labor markets.By extension, reduced jobless claims traditionally is seen as a strength that can power recoveries or rallies in US markets.It should be noted that initial jobless claims and continuing jobless claims often do not yield the same market impact.This is due to the fact that initial jobless claims measure emerging unemployment, which are released one week before continuing jobless claims. As such, the initial claims typically have a higher impact on the markets.
Read this Term. If claims stay sub-300K, the theme remains in play. With that are non-farm payrolls
Nonfarm Payrolls

Nonfarm Payrolls (NFP) is the single biggest monthly economic news indicator released out of the United States, usually on the first Friday of every month. Reported by the US Bureau of Labor Statistics, the NFP measures the increase or decrease in the number of people employed during the previous month, except for those working in the farming and agriculture industry.The NFP can also be referred to as an Employment Change, and is the most anticipated monthly report. As it’s released at the beginning of each month, it typically causes huge movements in the financial markets, especially in the foreign exchange market. Traders care about the NFP because the creation of jobs itself is one of the most important indicators of consumer spending, a vital barometer that underpins the country’s economy. NFP does not include farming jobs, primarily because these jobs are markedly seasonal, which can cause inconsistent reporting. Essentially, it represents all business employees (excluding general government employees), private household employees, and employees of nonprofit organizations, accounting for about 80% of the workers who contribute to the GDP.Prior to the actual figure being released, industry experts make an educated guess as to what the figure will turn out to be, known as the “expected figure” or “forecasted figure”.  Thus, if the actual figure released is greater than what’s expected, then there are more people employed than initially thought, which is great news for the economy.Such an outcome results in traders investing in the US dollar, giving it strength. Likewise, if the actual figure is lower than the forecast, the US dollar typically weakens.However, this is by no means a hard and fast rule, as there are other news reports coming out at the same time, plus revisions can make things extremely haphazard. How to Trade Nonfarm Payrolls Often, traders wait in earnest (or trepidation) for the release, with considerably less trading activity just before the release, often called the calm before the storm, as a price squeeze takes hold.Some traders actually trade these huge spikes (known as news traders), by entering the market immediately after the figure is released, and just before the price makes its move. Depending on how much divergence there is from the expected figure, retail news traders try and take advantage of the fact that there’s guaranteed to be huge movement.

Nonfarm Payrolls (NFP) is the single biggest monthly economic news indicator released out of the United States, usually on the first Friday of every month. Reported by the US Bureau of Labor Statistics, the NFP measures the increase or decrease in the number of people employed during the previous month, except for those working in the farming and agriculture industry.The NFP can also be referred to as an Employment Change, and is the most anticipated monthly report. As it’s released at the beginning of each month, it typically causes huge movements in the financial markets, especially in the foreign exchange market. Traders care about the NFP because the creation of jobs itself is one of the most important indicators of consumer spending, a vital barometer that underpins the country’s economy. NFP does not include farming jobs, primarily because these jobs are markedly seasonal, which can cause inconsistent reporting. Essentially, it represents all business employees (excluding general government employees), private household employees, and employees of nonprofit organizations, accounting for about 80% of the workers who contribute to the GDP.Prior to the actual figure being released, industry experts make an educated guess as to what the figure will turn out to be, known as the “expected figure” or “forecasted figure”.  Thus, if the actual figure released is greater than what’s expected, then there are more people employed than initially thought, which is great news for the economy.Such an outcome results in traders investing in the US dollar, giving it strength. Likewise, if the actual figure is lower than the forecast, the US dollar typically weakens.However, this is by no means a hard and fast rule, as there are other news reports coming out at the same time, plus revisions can make things extremely haphazard. How to Trade Nonfarm Payrolls Often, traders wait in earnest (or trepidation) for the release, with considerably less trading activity just before the release, often called the calm before the storm, as a price squeeze takes hold.Some traders actually trade these huge spikes (known as news traders), by entering the market immediately after the figure is released, and just before the price makes its move. Depending on how much divergence there is from the expected figure, retail news traders try and take advantage of the fact that there’s guaranteed to be huge movement.
Read this Term, JOLTS, survey data and layoff announcements. If those crack — and particularly if they crack faster or at the same pace as the rest of the world — then I’ll have miscalculated and will reevaluate.