When America entirely takes up this week's newsletter.🇺🇸🌭
Issue 043 -- WTF is going on with the Economy?!
Photo by Aditya Vyas on Unsplash
Hey there, and welcome to issue #043 of WTF is going on with the Economy?! -- abroaden.co's weekly no-BS economics newsletter for people living and working abroad.
What we're watching
America's Big Week🦅
Over the last week, the US economy went on a bit of a roller coaster ride.
A series of events rocked investors, strengthened the dollar, and brought all eyes on its markets in short order.
Here's what happened and why you should know about it (aside from impressing your friends with this knowledge, of course).
The jobs report🏗️
On the first week of the month, the US labor department releases the job figures from the previous month. Economists and investors love this day as it gives a great indicator of how the US economy is doing. This number shows how many jobs companies created or removed (excluding farm work, since it's seasonal) during a month.
February's figures -- released last Friday -- blew waaaay past the expectations of most economists. Instead of the predicted 210,000 new jobs, the US added 379,000; This estimate-smashing report boosted the markets. It's an unmistakable sign that people and companies are feeling optimistic about the immediate future.
The stimulus bill📜
Over the weekend, the US Senate passed its version of Biden's 1.9 Trillion USD stimulus bill. While not final (the Senate version has to go back to the lower house for reconciliation), it's all but a done deal. With that, the American economy will get an American-sized injection of cash over the coming year.
This amount is massive. It should enable the US economy to recover from the pandemic much faster than in the aftermath of the 2008 financial crisis. However, despite markets generally reacting well to this news, not everyone is sure that this spending package spells good news.
The Fed's non-move and inflation🏦📈
On Thursday, the head of the Federal Reserve (the US central bank), Jerome Powell, didn't say something. More precisely, he didn't say that he was going to raise interest rates right now.
Why is his silence so newsworthy?
The Federal Reserve has two core jobs:
Control inflation
Maximize employment
Setting interest rates (which ripple throughout the economy, impacting everything from savings accounts to mortgages) is their primary tool to reach these objectives. By keeping interest rates low, the Fed implicitly says that too much inflation isn't a problem right now. Since inflation usually happens in the run-up to a recession, investors and economists see a lot of growth on the horizon.
That leads us too...
The big treasury sell-off 🏷️
If you'd ask a finance guru, she'd tell you that treasuries -- aka the government debt (loans) -- are about the safest place to park your money. The American government isn't at risk of going broke, and when times are tough, you can count on it to pay you back.
However, when the economy is looking up, these effectively "risk-free" investments lose their appeal as investors want to 'gamble' on higher-risk stocks and bonds (loans). Last week, investors holding treasuries decided to start selling them so that they could put their dollars into the stock market.
As a result, the 'yield' or interest rate of treasuries began to climb (bonds have an inverse relationship with price and interest rate. If there's a lot of demand for a bond, the borrower can charge a lower rate. Because the demand is high, the price goes up. Likewise, when there's little demand, interest rates go up, and prices go down to attract investors).
Last week, the interest rate on a 10-year loan to the US government hit its highest level since January 2020, adding even more optimism to the American and global economy.
And The US Dollar comeback.💲
Put together, these positive developments in the US shot demand for dollars through the roof. Not only are global investors chasing a recovering US economy and the stock market, but they're also attracted to higher treasury returns. Combined, this put the US dollar in a stronger position versus its peers. In contrast to much of the developed world, the American economy is entering into the next recovery phase.
With so much uncertainty over the future, investors will continue to chase returns wherever they can find them. This week was a wild one for the US. It is by no means the last one for the year.
That's all from us this week. Have a great one!