Watch for Fireworks Soon

02/16/2011 12:22 pm EST


Andrew Busch

Editor-in-Chief and Publisher, The Busch Update

Do you think the market had been unusually quiet, at least before the Japan earthquakes? The second quarter likely will see another surge of volatility, as the European bailout and US unemployment and debt issues take center stage, says Andrew Busch of BMO Capital Markets in this exclusive interview with

This economy is recovering, and it looks as though we’re not going to have a double dip. But we do have a very slow recovery and very sticky unemployment.

Can you tell us what you see? Give us the next year and maybe a few years, in terms of what this recovery is going to look like here in the US.

Well, we know that this is running well below what other normal recoveries are and have produced as far as jobs go—and growth. I think 2011 is going to be a much better year than last year. .

We’re looking at growth somewhere between 3.5% and 4%. Some people are coming in even higher than that. The numbers we’ve seen recently from the ISM—both service and manufacturing—look great.

The one thing that everybody knows that haven’t picked up is, of course, employment, and that’s really the key to the whole recovery.

Now it’s strange, because we have the unemployment rate dropping, but that has a lot to do with people dropping out of the work force. We have non-farm payrolls, or the establishment survey, not showing very much growth there. But we have other surveys, like ADP, that are picking up much stronger growth.

Typically, ADP—although everybody maligns that one—picks up changes in the work force a lot faster because it includes companies that are newer. You know, only two months into their establishment, they will pick up on ADP. So, ADP looks strong to me.

I think we’re going to get significant growth in employment and it’s coming in the next couple of months, so therefore I’m more optimistic than most people.

And, of course, the payroll tax cut for this year is going to add another one-half to a full percent of growth onto GDP. Initially it was 2.5%, maybe 3% without it. Now, we’re looking at 3.5%, maybe 4%.

When will the Fed start to raise interest rates? At what unemployment rate would you see it?

Well, I think the market is already pushing them a little bit. I mean, the ten-year has moved so significantly since November—we’re over 100 basis points in the ten-year, which reached a peak recently of 3.75—so the long end is really nervous about what the Fed is doing in quantitative easing.

[Fed Chairman Ben] Bernanke, in recent testimony, said that he would look at pulling back from QE2, should employment continue to grow.

I would say the market’s expectations, prior to this month, were only for maybe a 25% chance that the Fed would raise rates in December 2011. Now that’s up to 100%. So, the market is anticipating faster growth and anticipating higher rates. We’re anticipating the Fed to move quicker, rather than later.

On Fed Funds and discount, or just…

Well, both together, obviously­—25 basis points. And that could accelerate, move forward, if we get strong employment numbers. I’m looking at the unemployment rate dropping somewhere down about 8.5% by the end of the year.

That’s interesting. How does the dollar figure into that? Will that be enough of a goose to get the dollar strengthening?

The thing is, you know for the dollar it has to occur only by itself—and we know that’s just not the case.

But I would say this: I don’t think we’re going to see strong growth out of Europe. I think everybody knows that. Germany has obviously had stellar growth. That’s one of the reasons why the Euro has performed so well.
But I think they’re going to slow down just a little bit in this first quarter.

So, I think when we have this shift in expectations—the initial shift, with the other group staying the same—that you get a dollar rally. So, my guess is if we get one or two months of strong non-farm payroll data—where we get 200,000-job growth—then we’ll see the dollar begin a strong rally.

So, that would be later this year?

I think it could be in the next couple of months.

So, by midyear you expect a stronger dollar?

Yeah, I would say. You know, it’s going to ebb and flow a lot. In the currency world, things change rather quickly, as you know. The currency markets will make you look very foolish for predicting what’s going to happen at the end of the year.

I only like to go out in certain kind of discrete periods. One of the periods I’m really interested in is what’s going to happen in March, because that’s where the politics and money worlds collide.

By the end of March, the ECB and the European Union have to come up with a bailout plan for all of Europe. [This actually happened March 12; read about the details of the plan here—Editor.]

The market is anticipating something decent happening there. If they don’t get it, the Euro will weaken and I think will look pretty weak against all these other currencies. It will aid the dollar at that time.

And you think there’s a pretty good likelihood of that happening?

I do. Market expectations are running pretty strong that they’ve come up with something decent—a Brady Bond-type program.

But I’m not sure they’re going to sell it really well because they have to essentially say to the other countries, “Look, either you follow the rules, or you get kicked out, or it will cost you a lot of money.”

I’m not sure they’re going to go along with that.

That’s fascinating. There could be some fireworks.

Definitely. Oh, and then you’ve got the US budget, and then of course they have to raise the debt ceiling in April and May, so that could be a lot of fun too—it’s going to be a very volatile second quarter.

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