Payrolls Report Changes Nothing About Fed's Next Move

by devteam June 8th, 2013 | Share

Today’s payrolls numbers had a chance to give clear pause to near-term tapering prospects, IF it had been weak enough.  It similarly had a chance to suggest tapering might even make it’s way into the text of the upcoming June 19th FOMC Annoucement if it had been as far beyond expectations as April’s report (on May 3rd).  Instead, the numbers did an almost perfect job of avoiding clear suggestions in favor of either eventuality, effectively keeping the timing of the Fed’s next big move shrouded in the same frustrating fog.</p

Compared to the consensus among economicrnforecasters of 170k, today’s NFP increased by 175k.  The previousrnreport was revised 16k jobs weaker, and the report before that 4k jobsrnstronger, for historically minuscule net revisions of -12k.  Together with those revisions the 5k gap from forecasts is not a statistically significant</bvariation to label the report anything other than "as expected."</p

There wasrnsome talk in the media and among analysts of whisper numbers in the 110-150krnrange.  Moreover, human nature as well as the nature of financial marketsrnfavored a lower number  after an incredibly strong report previously andrnan incredibly weak report before that.  Today was to be the warm bowl ofrnporridge in that regard, and it turns out forecasters did a great job ofrnhoning in on that warmness at 170k vs the more emotional consensus around 130k.</p

It bears brief mention that yesterday’s anomalous gyrations drew morernthan a few comments that wondered if something about the NFP outlook hadrnchanged for some reason.  Any sort of “leak” from the BLSrnhas been and continues to be highly unlikely.  But even if discussion ofrnpotential leaks was only in jest, when we see a massive bond market rally thernday before NFP, in high volume, and decidedly lacking in satisfyingrnexplanations, it’s enough to cause some doubt about any potential tiesrnto the upcoming data.  </p

That may have helped facilitate some of yesterday’srnstrength, or rather, may have sparked doubts that helped yesterday afternoonrnfrom having a more sincere correction back to a pre-NFP defensive stance. rn”Somewhat lulled into a false sense of security by an enigmaticrnmega rally the day before NFP,” I might say.  </p

Regardless of the ‘whispery’ expectations vs economists expectations, thernnumbers are the numbers, and they’re now building a clearer picture of arnsluggish, but stabilizing labor market.  Please understand that the Fedrnwill taper bond buying if we can merely maintain this current pace in laborrnmarkets. The media chatter about a 200k NFP benchmark for tapering is not a safe assumption. </p

The notion of a 200k benchmark does indeed have legitimate basis, especially in speeches from Chicago Fed’s Evans.  But as we’ve discussed at length, both in the MBS Commentary and on MBS Live, ANY of the Fed’s thresholds, explicit or implied, are never going to be hard and fast lines in the sand.  </p

Fed governors and even Bernanke may have mentioned the payrolls-based thresholds in speeches, but they’ve been even more clear to point out that there is no clearly delineated line in the sand from one economic metric.  What would it matter if job creation stayed at 175k if other economic metrics were stable to improving?  Incidentally, that’s entirely possible according research out yesterday from the Chicago Fed: </p

“For the unemployment rate to decline, the U.S. economy needs to generate above-trend job growth. We currently estimate trend employment growth to be around 80,000 jobs per month, and we expect it to decline over the remainder of the decade, due largely to changing labor force demographics and slower population growth.” </p

Price stability is a factor as well, but the Fed has other,rnbetter ways to control that if the economy can get off its metaphoricalrnhospital bed and walk to the bathroom for the first time since 2008.  Tapering<bis NOT something the Fed’s going to do in response to the economyrnimproving.  Rather, it’s something the Fed’s going to do if it can be donernwithout making the economy weaker.  Regardless of how anyone would assessrnpotential “strength” in this latest jobs report, it at least showedrnan economy that’s not getting any weaker. </p

Fortunately, that fact has been very well priced-in to markets sincernMay 10th, and markets were doing a tremendous job of trading according to thatrnconsensus.  Today’s losses are made worse by yesterday’s somewhat freakishrnimprovements.  This is why I said that yesterdayrnchanged nothing.  That article leaned heavily on assumptions aboutrnthe range created on 5/28 and 5/29.  Since then, bond markets consolidatedrnfrom the lows and highs of that 2-day period (more consolidation in Treasuries,rnmore falling back to the lows in MBS).  </p

Yesterday marked the first significant lead-off from those patterns, and nowrntoday’s data puts us right back in the most central zone of the past two weeksrnon both sides of the market.  Indeed, yesterday changed nothing, but nowrnwe see ‘today changed nothing’ as well!  The conclusion is that we’rernnow waiting to see how the Fed treats the past month of market volatility andrneconomic data in the upcoming policy Announcement on June 19th.  This timernaround, the range might not stay quite as well behaved.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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