Friday’s stronger-than-expected October jobs report, on the heels of Thursday’s stronger-than-expected advance GDP report, has Wall Street buzzing (again) about prospects for Fed tapering sooner vs. later.
- The 204,000 payroll data for October, plus 60,000 in upward revisions for August and September, means job creation “is now well within the zone consistent with a December tapering,” writes Alan Ruskin, a strategist at Deutsche Bank.
- “This stronger trend shifts the expected timing of the Fed taper of asset purchases to January (from March-April),” according to JPMorgan Chase senior economist Robert Mellman. “The timing could be earlier if the labor market continues to surprise on the upside...”
- “The Fed has two 200K numbers to hang their tapering hat on… private jobs 207K August, 150K September, and 212K October,” writes Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ. “200, the Fed’s number on their wish-list before tapering. They got it, let’s see them squirm their way out of this one.”
But let the squirming begin, says Michelle Girard, managing director and U.S. chief economist at RBS.
“I understand why people are thinking – ‘they flipped in September, they could flip back in December’ - [but] the Fed is going to be slow here to reintroduce the idea of tapering,” Girard says, citing the following:
- Data Matters: “It isn’t as if these are blowout numbers,” she says, referring both to Friday’s jobs report and Thursday’s GDP report. On the jobs front, the labor participation rate continued to fall (to a cycle low of 62.8) while the unemployment rate rose to 7.3%. On the GDP front, the 2.8% gain was due in large part to inventory building and consumer spending was the weakest since 2001. (Later Friday, the University of Michigan said consumer confidence fell to its lowest level since November 2011.)
- DC Dysfunction: Very similar to September, the Fed may be reluctant to take action in December given the uncertainty over the budget process. The risk of another government shutdown or debt ceiling crisis in early 2014 “argues for a more patient Fed than the market fears today,” Girard says.
- The Calendar: “I still think it’s tough to start these kind of moves at the end of the year,” she says. “Everyone is buttoned down, it’s very illiquid. This is something the Fed will take up in the first quarter of 2014.”
Overall, Girard describes the economy as “resilient” and consistent with the Fed rethinking the need for its $85 billion-a-month QE program. But she thinks that’s a 2014 story and contingent on the economy continuing to move forward and no repeat of the Congressional drama of October.
"They don’t show any urgency to move quickly in terms of taking back any support," Girard says of the FOMC.
Importantly, she expects Janet Yellen to “shift away from asset purchases or QE and instead providing support by telling everyone rates aren’t going up anytime soon.”
That, of course, assumes Yellen’s nomination to become Fed Chairman survives next Thursday’s confirmation hearing – something we’ll cover in an upcoming segment.