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A term that has been greatly flouted about in the past couple of weeks in the market is the term “US exceptionalism”. What is this term all about, and how did this come about in the market?
The easiest way to understand this term is in the movement we have seen in the US dollar. The US dollar index climbed for 10 weeks in a row, meaning either the world is running scared and avoiding risk, or something is brewing in the US. The answer would most probably be a mixture of the two, and this scenario has seen the US dollar outstripping its peers.
USD Index Rising Uninterrupted |
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What does the data tell us about the difference between the US and the rest of the world?
First, let’s have a look at the rest of the world. We have seen the European Central Bank hiking interest rates in desperate situations, with economic growth faltering and inflation bounding along rapidly. The picture in the UK is not better, with the Bank of England also trying to stem the tide of inflation with their monetary policy, and thus far not succeeding. The world’s growth engine, China, has barely moved the needle in terms of economic activity after opening up its economy after COVID-19 and is facing its own problems, with a housing market that leaves a lot to be desired.
US Inflation is on a downward trend |
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This brings us to the United States: despite the hiking in the US, the economy is still chugging along at a decent clip, inflation is heading lower at a quicker pace than expected, and the economic figures have barely flinched in the wake of all the hikes.
The strength of the US economy has led to calls that the US could hike rates further and keep rates higher for longer. In a world where the outlook is not great, the US economy is sticking out a shining light, and quite rightfully the place where investors will flock to.
US Debt repayment skyrockets |
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Before we go all out on praising the US economy and how they have handled the higher inflation, there are some cracks starting to appear on the horizon. A lot of talk is doing the rounds that the effect of the hikes has not yet fully washed through the market. The real effect will only start being felt as corporations and individuals need to refinance their debt. This could slam the brakes quite hard in the US economy as lack of credit normally puts a stranglehold on an economy.
Savings are drying up |
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The consumer is another reason why the US economy has been chugging along. Consumers have been flooding the US market, and consumption numbers are through the roof. The question is: how do consumers fund themselves? Is it either through savings or debt? While the cost of debt is running higher, savings in the US have dwindled, and with the freeze on student loan debt almost over, it will only be a matter of time before the consumer runs into trouble.
US economy could avoid recession |
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Lastly, unemployment has been sticky, and the US economy has yet to have a fallout with the higher interest rate in the job market. One can expect this picture to change if the consumer starts slowing down, and the expectations are that Non-farm Payroll numbers will begin to fall. The old adage is probably true at this stage on how something breaks: it starts little by little and then suddenly breaks.
The market, for the moment, expects the US to skirt a recession, but it would not take much for the US to join the rest of the world on the wrong side of the economic equation. |