US job data vital for world mkts; $ in its prime: Roubini

At a time when most international markets are nervously awaiting the US jobs data, Arnab Das of Roubini Global Economics says the macro data will be of extreme importance in the short-term.

Das is of the view that if the payroll numbers for June are strong, it will strengthen the impression of the Fed tapering its quantitative easing (QE) sooner rather than later. However, Das adds that even if the numbers are weak, it won’t mean a negative for the US economy. Also read: Steady US job gains to keep Fed's focus on tapering
"Even if the data is not that good, the reality is that the US economy is further along in its balance sheet repair. It is structurally more flexible, there is more rebalancing going on, there has been more balance sheet repair in the household sector and the financial sector. So, the US which went down into the crisis first is going to come out of the crisis first both because of sequencing and because of concerted policy action,” adds Das in an interview to CNBC-TV18.
On the battering emerging market (EMs) currencies, Das says that the rupee weakness is not a country specific event, but an episode for dollar strengthen relative to the rest of the world. Below is the edited transcript of Das' interview to CNBC-TV18. Q: What is your call? How important is the data tonight? Going forward what kind of reaction would you expect if this data is good?
A: In the short-term, the labour market data in United States is going to be quite important. The bigger picture that is shaping up is a divergence in economic performance and in policy between the United States and the rest of the high-income world. So, if today’s non-farm payrolls data is quite strong, it will strengthen the impression that the Fed tapering will come sooner rather than later.
Even if the data is not that good, the reality is that the US economy is further along in its balance sheet repair. It is structurally more flexible, there is more rebalancing going on, there has been more balance sheet repair in the household sector and the financial sector. It has seen more forced recapitalisation and now, there is a balance sheet repair advancing in the public sector as well. So, the US which went down into the crisis first is going to come out of the crisis first both because of sequencing and because of concerted policy action.
In contrast is Europe and United Kingdom. The major central banks in the euro zone, sent a very clear signal that monetary policy would remain very loose for long time which is also the case in Japan. So, there’s the discourse that United States is shifting towards a reduction in the pace of easing whereas the rest of the high income world is continuing easing. Therefore, what is taking place in the rupee is not so much rupee weakness, it is really the cusp of an episode of dollar strength relative to the rest of the world. Q: How will things play out hereon? Do you expect that if the nonfarm payroll numbers came in stronger we will have yet another bout of emerging market (EM) bonds selling and currency risk-off playing out or will that substantially get countered because three other central bankers are still in liquidity easing mood?
A: It will not be a generalised risk-off as much a more concerted outperformance of risky assets in United States compared to risky assets in the rest of the world. This is because a strong nonfarm payroll number today will confirm that the recovery is persisting despite the onslaught of the fiscal drag that began in the first quarter of this year and may take some more steam out of the economy in the second quarter. The numbers would also suggest that the private sector is healing enough to gradually takeover the baton from the Federal Budget then that would suggest eventually it would be able to takeover the baton from the Federal Reserve as well. Q: What is the lesson for EMs like India? What are you expecting, a further exit of foreign funds from bonds and equities? How would you prepare for the next quarter if you were an India investor?
A: I would be underweight and steer clear of EMs. I would not necessarily panic sale because of a strong non-farm payroll number. Our impression generally is that there has been a lot of position squaring and clearing of a lot of decks in the recent waves of volatility that have taken place.
There maybe some more kneejerk reaction like and of course one needs to protect oneself against that. However, the bigger picture is that the world economy is rebalancing with the US healing itself and EMs are not doing so well. The growth differential has narrowed substantially.
The idea that EM countries were going to catch up in a straight line never seemed very credible to us. That has come under a lot more scrutiny with the slowdown of China, India and the ripple effect of that through commodity exporting countries in Latin America, Russia, Commonwealth of Independent States (CIS) and Sub-Saharan Africa. So, I think the tide maybe turning a little big against the untrammeled EM optimism that we had for such a long time after the global financial crisis.
That is not to say that we are going to have EM falling off the map and entering immediately into a crisis, but we are going to have to have some adjustments in EM. There will be readjustments in India as in China, Brazil, Turkey, Russia, South Africa, so its not just the BRICS, but among many large EM countries that are current account surplus countries like Russia and China or deficit countries like Brazil, India and Turkey. And we have had a very significant domestic credit boom and private credit-public credit and now the economy is slowing down. So, some of the problems that have been stored up are going to start to come out. Q: Do you think the rupee has substantially discounted these negatives or do you think you will see further weakness in 2013 itself? What is your view on gold? Is there more to go by way of declines or are all these other central bankers keeping it hydrated?
A: On gold, an important part of the emergency has passed that caused gold to be such a desirable hedge against either a high inflation because we try to print our way entirely out of this problem or severe deflation because we try to default our way of this problem of excessive debt in the west. What the gold market and participants in it are realizing, is that the tail risks have substantially improved in United States and substantially suppressed in the euro zone through the commitment to the European Central Bank (ECB). So, gold does not have much upside. If anything, it has some further downside. It will not collapse probably significantly from here, because nothing in euro zone has really been resolved and as the crisis in Portugal suggests, politics and the social backlash against the policies in place could still resurrect that particular emergency.
Atleast, the US emergency seems to be over. Gold is an emergency safe haven. It is not a safe harbour like treasuries which is about financial stability. On the rupee there is probably some risk of further weakness. It does not seem like the government is willing to intervene very much to stabilise the rupee which distinguishes it a bit from some other countries that are experiencing currency pressure in emerging Asia. So, that is good and bad. It is bad in the short-term if one is long rupee or rupee assets. It is good because it will help the external adjustment that needs to take place in India and it will not further damage the public sector balance sheet by running down reserves. So, I do think there will be some more weakness but it will not be falling out of bed.