US adds 266k Non Farm Jobs in April

Today we take a dive into some of the economic news and using the skills we have learnt in the previous blogs, let us see if we can make heads or tails on what it means for you. We will combine skills from US non farm pay jobs and US dollar index blogs. As a reminder US non farm payroll data, is data that shows employment statistics growth or decline in the construction, goods, and manufacturing sectors. The US dollar index measures the strength of the dollar against, the Euro, Japanese Yen, Pound Sterling, Swiss Franc, Canadian Dollar and the Swedish Krona.

On May 7th 2021 the US announced the non-farm payroll data for the month of April and stated that the US economy had added 266,000 new jobs. They then revised the number for March down from 916,000 to 777,000. What was expected after the March numbers was that April numbers would be upwards of 1 million.

Remember, having previously said that the US is a consumption driven economy. Consumption is a function of disposable income, with the primary source of income being employment. Therefore, with only 266,000 jobs added, it should translate to a dampening of demand in the US economy and therefore a slowing down of the same.

In the US non farm payroll blog, we mentioned that if the non-farm payroll continued to increase at a upwards of 700,000 jobs per month we would see a strengthening of the dollar and an increased risk appetite. If you look at the period between February and March 2021 where the US added (before the revision) close to 1 million jobs, the US dollar index increased from 90.1 points to 93 points by end of March. This highlights the US dollar strengthening against the Euro, Japanese Yen, Pound Sterling, Swiss Franc, Canadian Dollar and the Swedish Krona.

At the same time Stock prices also gained. As jobs are created consumption increases, company profits increase and therefore stocks become more attractive. The S&P 500 which measures the general movement in stock prices in the US moved from 3,768 points in March to peak at 4,232 points. This confirms what we learnt in the two blogs on employment and exchange rate.

However as stated above, in the month of April, the US jobs number was below par and therefore the opposite happened to the US dollar and general risk appetite. The US dollar weakened and the general risk appetite reduced. From May 7th 2021, the day of the announcement, the US dollar index has dropped from 91.22 points to 90.12, as of May 11th 2021. US dollar index has dropped from a high of 93.06, at the beginning of April 202. This means that the US dollar weakened. The effects of a weakening Dollar can be found in the US dollar index blog. Risk appetite also reduced as the S&P 500 dropped from 4,232 to 4,150 points on the day of announcement. The sentiment is that the US economy might not be recovering as fast as we all thought.

What does all that mean to you,

  1. US stimulus spending is not about to end anytime soon. This translates to more cheap risk free money circulating, which might all end up in the stock market, meaning stock prices might continue to rise on the back of no fundamental increase of their own but on cheap money.
  2. Inflationary pressures will continue to rise as more money is poured into the economy but with no similar rise in supply.
  3. A slow US economic recovery means a drag on global demand for commodities and that means a gradual drop in their prices, reduced export earnings and currency volatility.
  4. Interest rates might be held steady at near zero levels. (To find out what this means look out for the next blog post)

Inflation

Coming on the heels of our discussion on the strengthening of the US dollar where we concluded with the statement that life might become expensive, well the latest economic news hitting the buzz is inflation going up in the US, Eurozone area and globally and on this blog post we look at what it means to you?

Inflation is defined as an increase in the price level in an economy. For example, if you bought a box of mangoes for $100 in January 2020 and you now, in 2021, buy the box of mangoes at a price of $110, this means the price of mangoes has gone up by 10%, rather obvious right, but what does it mean to you? Well, it means that you need more money to buy the same quantity of mangoes which then translates to a reduction in your disposable income by $10. Assuming your income has not increased by that same $10 then you will have cut down on another area and as is common with us we will cut down on saving.

We can therefore define inflation or look at inflation in another way, as the reduction of your purchasing power or your ability to make purchases. When Inflation numbers are announced, you normally hear that the annual inflation rate for a given country is 2.9%. This number does not refer to one single good but a basket of goods. For example on an individual level you have a monthly basket of goods and services you procure, it could be you pay rent, buy rice, sugar, cooking oil, pay for a taxi to go to work, electricity, water etc. If all that costed you $1200 per month and now costs you $1500, that means your cost of living has increased by 25% or your price inflation is 25%. Note, however the prices of rice and electricity might have come down, but the prices of water, sugar, transport might have gone up higher than the decrease in the former two, therefore meaning your inflation has increased.

Therefore, when you read or hear that the annual inflation of your country has gone up it is a measure of a basket of weighted goods, weighted based on what constitutes the largest share of wallet for the country and in most countries, food takes number 1 spot.

What then is the effect of an increasing annual inflation in your country?  We will use the US as an example as their inflation has far reaching impact out of their borders. When the US annual inflation increases, we expect the following natural outcomes, assuming no intervention by the US authorities:

  1. Reduction in the purchasing power of the Dollar
  2. Weakening of the US dollar

Effect number 1 would mean that the disposable income of the average US citizen would reduce as the purchasing power reduces as explained in the mango example above. A reduction of US citizens’ purchasing power has a huge impact on global demand as explained in the earlier blog US NON Farm Jobs and the main impact being a reduction in demand for commodities, you may click on the link and refresh.

Effect number 2 would mean that imports for countries paying using the US Dollar, will become cheaper and exports for countries whose currencies will strengthen against the dollar will become less competitive. This means imported goods in your supermarkets might become cheaper making locally produced goods less competitive and some SME’s might find themselves out of business. Oil being one of the major imports in most African countries, a weak dollar might give a slight reprieve on pump prices.

With these effects in mind, it is important to follow the inflation projections as they will determine what your purchasing power is, and consequently affect your consumption choices.

What Does a Strengthening US Dollar Mean- THE US DOLLAR INDEX

There is a lot that has been going on globally, and there is a little trend that could have easily slipped by the radar. The US dollar has been strengthening since the beginning of March 2021, against its largest trading partners excluding China. In the year 1973 the US federal reserve created a US dollar index which measures the strength of the dollar against, the Euro, Japanese Yen, Pound Sterling, Swiss Franc, Canadian Dollar and the Swedish Krona.

The US dollar index started at a base of 100 and hence if one is looking at it historically if its at 80 points it means that from the base year the US dollar is weaker by 20% to the basket of currencies and if it is at 112 points this means it is 12% stronger.

If we look at the US dollar index from late February to end of March 2021 you will realize it moved from 90.01 points to 93.23 points as highlighted below:

Source: Bloomberg Markets

That is a 3.6% gain by the US Dollar against the 6 currencies. What does an increase US dollar index mean? The US dollar is key because most commodities are priced in the US dollar. An increase in the US dollar index leads to a fall in commodity prices. Why is this so? If maize is priced in Dollars and the US dollar strengthens against your local currency call it the South African Rand, it means you will need more Rands to buy the same quantity of maize. If the product is not essential what will happen is demand for the maize will reduce leading to a reduction in its market price so that the quantity purchased goes back to the same level before the increase of the US dollar.

However, for products like Oil which countries need as an essential an increase in the US dollar will lead to using more of your local currency to buy the same quantity of Oil and the pump price will go up at your local fuel station.

If the US dollar continues to strengthen then we are entering a cost push inflationary period. This is inflation due, not to increased demand, but increased costs and it is not a good inflation because local central banks do not have any tools to deal with this kind of inflation.

What does that mean to you? Well life might become a bit more expensive for us as prices of basic commodities might begin to increase, cost of energy, transport, and manufactured goods. If economic laws do hold then we should see a gradually increase in interest rates especially in developing countries causing the cost of credit to rise. However, this presents an opportunity for good, fixed income investments.

We have looked GDP , Employment Numbers, Sovereign Credit Ratings and now US Dollar or currencies. We will continue building our What Does it Mean tool kit so that you can see, hear and act on the news that comes around you, to be able to make better informed personal and business financial decisions.

Africa Sovereign Debt Ratings Downgrades

Welcome back and thank you for the continued support.  In today’s post, we look at sovereign credit ratings downgrades for African countries the latest one being Kenya. A sovereign credit rating is when an independent organization provides an assessment on the ability of a government to repay its debt after looking at various issues such as economic growth, political stability et al. African countries have been borrowing on the Eurodollar market for the last couple of years and getting a rating becomes important to be able to access the foreign markets. Africa last year owed upwards of $100bn through Eurobonds.

The main rating agencies in the market are Moody’s, S&P, and Fitch.  The rating scale ranges from “Prime” to “In default” using symbols as shown in the table below:

Source: CountryEconomy.Com

A country’s rating determines 3 important things:

  1. The interest rate they will pay
  2. The tenure of the loan
  3. Type of investors they will attract.

The higher the rating the lower the interest rate paid, the longer the tenure and the higher the chance of accessing patient capital. For example, the United States is rated AAA as the highest rating and has 10 year yields of 1.62% compared to Kenya which is rated B, and has yields of close to 8.2% a risk premium of more than 6%. Unfortunately, due to various factors most of them culminating in the lack of proper leadership, most of the African countries fall in the non-Investment highly speculative grade. What does this mean? it means most African countries will:

  1. Borrow expensively.
  2. Borrow for shorter terms.
  3. Be caught in a debt crisis as they must borrow more to repay debt.
  4. Attract high risk money that will flee at the scent of default.

Unfortunately, yet again there are upwards of 10 countries that have had their rating revised downwards, some moving from investment grade to speculative grade such as South Africa. What does this mean for these countries and you?

  1. Downgrades lead to an increase in the cost of refinancing, as countries will now have to borrow at higher rates
  2. Downgrades reduce the ability to access the Euro market
  3. Downgrades lead to debt distress

What is the impact of this:

  • More government revenue is used for debt re-payment.

When government revenue goes into paying debt, this means:

  • Less money for development which leads to stagnating economic growth
  • Less money means increase in taxes as government try to increase revenues
  • Less money means governments reduce hiring or even lay-off civil servants.

With the downgrades of African countries’ sovereign ratings, 2021 might be a year of slow real economic growth and reduced employment. This will lead to reduced demand and consequently, reduced business expansion. Businesses will have to cut costs, most likely employee costs, leading to larger unemployment numbers.

This is what it means when you hear of a sovereign rating downgrade in the news. Remember, this week the US nonfarm numbers come out, refer to my previous post on what these numbers mean for you https://what-does-it-mean.org/2021/03/08/us-non-farm-jobs/

US Non- Farm Jobs

Today we look at the latest economic data that has been released, which is the US Non-Farm payroll data for the month of February. The US Non-Farm payroll is data that shows employment statistics growth or decline in the construction, goods, and manufacturing sectors.

According to the US bureau of Statistics the US added 379,000 jobs in the month of February. To top it there was a revision to the January numbers from 49,000 to 200,000, an additional 159,000 jobs. What does this mean? A little background, the US economy is a consumption driven economy. This means that growth comes from spending by individuals. What drives individual spending? Spending is primarily a function of disposable income, (income that remains after paying fixed expenses and debt), and the level of interest rates.

Interest rates affect spending because they determine two things:

  • if individuals can access loans cheaper or
  • do they get enough compensation if they save. We will however deal with interest rates in the next blog post.

Disposable income is influenced or increases in an economy as more people get jobs as majority of people rely on employment as their main source of income (there are other sources of income). Therefore, with the increase or the added jobs in the US we expect increased consumption to kick in and help the US economy to recover. Why does that matter to anyone? Well, the US imports US$ 2 trillion from around the globe, with Asia getting the lion’s share of 45%, 25% from North America, 23% from Europe. If local US demand increases because more jobs have been created, there will be an increase in demand for the products they import. Consequently, the exporting economies also start benefiting and growing as they get inflows of dollars.

For Africa, as demand from the US increases, demand for raw materials from China and Europe also increases and US$ inflows also increase with time. This will lead to a bit of stability in the short run to their currencies. As a result of the improvement of the US economy, other currencies will also begin to strengthen, driven by an increase in exports.

I therefore foresee the following scenarios unfolding if the trend in US job increases continue:

  • A short-term strengthening of the Dollar. This will lead to an increase in the prices of imports.
  • Increase in commodity prices, especially Oil. This will cause inflationary pressures in oil importing countries, especially in the transport and electricity sector.
  • Increase in risk appetite. This might see a short-term influx of money in emerging markets stocks, however an eye on US interest rates might dampen that. We will however look at this in the next blog.

In summary, this is what the US Non-Farm jobs data means to you who is not in the US.

 Follow me on twitter @kadzutu and LinkedIn https://www.linkedin.com/in/reginald-kadzutu-36b66514 for periodic snapshot comments.

GDP? What does it mean

Welcome back as I highlighted in the previous blog, having and using information is very important to be able to navigate the world of personal finances. The key to thriving investments or financial decisions is to understand that you are not an island and you live within an economic environment and whatever that happens to that environment affects you whether you understand it or not.

Today I want to set the foundation of how the economic news should be viewed, or through which lenses shall we be looking at it. We have all heard of the term Gross Domestic Product of GDP said many times. We hear people say GDP has grown or shrunk, what is this GDP? And most times the news you hear one way or another affects this animal called GDP.

Well GDP is a matric used to measure the total output of a country in a year. It is a static measure of a single period in time. It measures the production in a country and as it should follow increased production should translate to increase incomes and wellbeing.

When anyone talks of GDP there are talking about the below formula, what makes or constitutes GDP

GDP = C + G + I + NX

C = consumption or all private consumer spending within a country’s economy, including, durable goods (items with a lifespan greater than three years), non-durable goods (food & clothing), and services.

G = total government expenditures, including salaries of government employees, road construction/repair, public schools, and military expenditure.

I = sum of a country’s investments spent on capital equipment, inventories, and housing.

NX = net exports or a country’s total exports less total imports.

So the lens we will use to see how the economic, political news of the day affects you is how it affects the C,G,I and NX. Its impact on those 4 variables will tell you how the economic environment is going to be affected and ultimately what does that mean for you.

Lets take the C if something affects consumption in the economy, that means demand for goods and services will reduce. If that happens corporate profits will also reduce and the ripple effect is that jobs will be lost and incomes will suffer and the economy will not grow as fast or even stagnant. This would trigger increase government spending to try and boost economic activity, or a drop in interest rates to spur activity. What would that mean for you? Well it could mean that as interest rates drop stocks will do very well and you are better of investing in the stock market. It means as well you can refinance your loan with a cheaper one to create more disposable income. If you are a business owner it means that demand for your products might be lower hence diversification might be an option.

Join me on the next blog as we pick the main highlights of the month of January and how they will affect you.

Introduction to What Does it mean?

Hello!

Let me introduce myself. My name is Reginald Kadzutu, a Zimbabwean living in Kenya. Growing up in these two countries my heart has been drawn to the never ending cycles of poverty and financial destitution amongst the population.

There are many reasons for this, ranging from corruption, misallocation of resources, disease, civil strife, repressive cultural practise especially against women and the list goes on.

However if you go down to the micro level, Africa is well known for its very low saving rates and hence low investment and therefore a chronic lack of wealth creation.

Is it a lack of opportunities? I doubt because opportunities are there. Is it a lack of capital? I believe this is just a symptom as capital is built through accumulated savings which are then allocated to productive investments.

I believe a lack of quality information and simplistic analysis that is understandable by a non technical person has produced a huge information asymmetry that has favoured the huge capitalist.

If this can be cured, I belive one informed individual at a time we can bring people, then families, communities and nations out of poverty. It is for this reason I have begun what does it mean!

What does it mean is a blog that will take the economic news of the week and explain what it means, how it affects the country, how it affects you, and what you may do about it.

Join me once every fortnight and let’s see if we will change the financial landscape.