Michael Santoli

A Good Jobs Report Could Revive ‘Taper’ Talk

Michael Santoli

Investors have been waiting more than two weeks for overdue economic data held hostage to the 16-day federal shutdown. But even after such an unwelcome delay, is Wall Street prepared for a potentially strong jobs report on Tuesday?

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From the very start of the government shutdown and Congressional dithering on a debt-ceiling increase, Wall Street has been fixated on what it sees as a silver lining to the fiscal follies: The Federal Reserve will likely wait to reduce its monetary stimulus efforts until well into 2014, according to the emerging consensus.

This makes perfect sense, given all we know about Fed policymakers’ thinking. In refusing to pare back its $85 billion in bond buying in September, the FOMC cited the potential drag on growth from fiscal disruptions — which now appears to have been presciently appropriate. The policy committee also suggested the housing recovery had not been sufficiently stress-tested by slightly higher mortgage rates to begin withdrawing its “quantitative-easing” help.

Assessing the damage

The shutdown pressured growth and will force economists at the Fed and elsewhere to take time to assess the damage. Meantime, with Fed chair nominee Janet Yellen awaiting confirmation and due to take over in January, many observers insist no course change is likely at Ben Bernanke’s final policy meeting in December – when, indeed, Congress will face a fresh budget deadline.

These are among the reasons Raymond James strategist Jeff Saut told Breakout that Wall Street will largely ignore tomorrow’s tardy employment data. In a similar vein, Chicago Fed President Charles Evans told CNBC Monday that it would probably be “tough” for the central bank to have enough confidence in the economic-growth picture by December to scale back QE.

And yet, even granting all this, a significantly stronger-than-expected reading on September employment growth would almost certainly restart the vigorous debate on when the Fed might begin “tapering” its asset purchases – a market conversation that consumed most of the spring and summer, helped lift Treasury-bond yields toward 3% and kept stock investors back on their heels.

Economists at Barclays Capital are among the relative few who profess conviction that a December taper move will occur, in part due to a pickup in job growth beyond current forecasts. The firm is looking for 200,000 net new jobs added in September — a number being bantered about more in recent days — and a dip in the unemployment rate to 7.2% from 7.3%, better than the official consensus forecasts of around 180,000 and an unchanged unemployment rate.

Does 200,000 = more 'taper' talk?

Michael Block, strategist at institutional broker Rhino Trading, says, “Consensus for tapering now centers on the March meeting, but it will be interesting to see if more respondents start pointing to December if that NFP number does indeed come in around or better than 200,000.”

This is not to say such an upside surprise would indeed sway the Fed’s intentions, certainly not on its own, given that the data cover a period before the shutdown, and Bernanke and Yellen will want a few months of numbers to discern the trajectory of growth.
Yet traders themselves would not likely wait around before rekindling “taper talk” and perhaps pricing in a greater-than-now-perceived chance that a policy adjustment is approaching.

Block himself doubts tapering will occur before March. But asked via email if he’s noticed such a refocusing of attention yet, he replied: “I haven’t heard anyone refocusing…. And that’s the point. If you get this upside surprise, they will QUICKLY refocus. I could see that happening quickly tomorrow morning if a +200k or higher print plays out. IF.” [Emphasis his.]

Ultimately, a less aggressive Fed should be welcomed as confirmation the recovery is moving ahead on surer legs, not to mention an accommodation to the fact that net Treasury issuance is declining with the narrower deficit.

Yet the markets in the past month have arranged themselves according to the prevailing belief that the Fed will lean toward being late in stepping back, not wanting to make a sudden move before economic improvement is unequivocal, or at least seen as less fragile. This has become a key element of the bullish thesis on stocks that has the Standard & Poor’s 500 trading at an all-time high.

Since the day before the Fed’s “non-taper” decision surprised the Street on Sept. 18, 10-year Treasury yields have fallen around 9% to below 2.60% from 2.85% (down from 2.98% in early September). The benchmark iShares MSCI Emerging Markets fund (EEM), which had been bruised since May when the taper vigil began on fears of capital flight from developing economies, is up twice as much as the S&P 500 since Sept. 17 and is back near a five-month high.

Given the field position of these asset markets and current investor psychology, an unexpectedly good jobs number could cause a reflex setback at least – even if it wouldn’t do much to change the likely path of monetary policy.

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