RBC CAPITAL MARKETS
Employment And Tapering
We were of the mind that tapering had virtually no chance of launching in December and following the November payroll number that narrative remains unchanged. The best you can say about this report is that it is another step in the direction toward tapering. But it will not usher it in this year. The reality is payroll gains of 203k are actually only a bit better than the 190k jobs we’ve averaged per month so far in 2013.
If the Fed was lamenting the slow improvement in the jobs backdrop at the October meeting (see the Minutes from that confab) then how much did things change in the wake of today’s report? Not much. With the data the Fed had in hand, job gains were averaging 178k year-to- date. With today’s report (and subsequent revisions) the average is now 189k.
For those thinking it was the shorter 3-month average driving their disappointment (not a very “Fed” approach, but we’ll entertain it), the data do not support this thinking. The 3-month average at the Oct meeting (data for July-Sep) was 143k and today (with revisions) the average for that same period is 167k. In other words, even if the Fed had the revised data in hand, it seems unlikely their assessment would have been very different.
Back to the November payroll number, it’s not as if we thought this was a soft report. On the contrary, we actually think it’s fairly constructive thanks to another sizable advance in the wage pie. Indeed, a few more reports just like this and the long-awaited Fed taper will finally become a reality. Our saying “a few more reports” is not an attempt at sounding casual. There are very sound reasons for why we think tapering will begin at best in March and not sooner.
Just to pick on December a bit more, the Fed has traditionally tried to avoid adjusting policy in illiquid year-end markets – most famously, the Fed did nothing at the December 2000 meeting and then eased 50bps intermeeting on January 3rd, 2001 with no meaningful news released between those two days. And they have been extremely nervous about the market overreacting to tapering (thus the focus on communications). So, as we highlighted above, we still think the odds of a December tapering are near zero.
As for January, we’ve been highlighting the transition issue from Bernanke to Yellen as an impediment. But for those unconvinced, then consider this. The Fed decision will be announced on Jan 29, one day before the first Q4 GDP report. As we highlighted earlier this week, there is a distinct possibility that growth comes in not just sub-1%, but that it prints close to zero thanks to an unfriendly inventory swing. How will markets digest tapering if less than 18 hours later the government is reporting topline economic activity ground to a virtual halt? Moreover, two weeks prior, CPI for December will be released and at this point we expect in the wake of significant holiday discounting consumer inflation will be hugging 1% y/y (from the current 0.9%). This will be more than enough to embolden the doves to push hard against a January taper.
Overall, this leaves us sticking with our March forecast. And for those that forget, remember, when it comes to forecasting the Fed, we are telling you what we think the Fed will do, not what we think they should do. If it was up to us, QE would have ended a long time ago.