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Jobs Data May Have Left 'Taper' Talk On the Table

25 October 2013 in Trading Ideas

The general consensus after last week’s delayed employment report from the Labor Department was that the numbers left a lot to be desired.

The final tally was 143,000 jobs created in September, and after revisions to the prior two months’ data, that means the average growth rate has been 148,000 net jobs created each month over the past three months. That’s down from the average of 186,000 monthly jobs created over the last year.1

Other details of the report were similarly uninspiring. While the unemployment rate did drop a tick to 7.2% from 7.3%, the share of Americans actively in the labor force remained flat, suggesting once again that virtually all of the improvement in the unemployment rate since June has been due to people leaving the labor force no longer being counted.

Similarly, the length of the average workweek – a sign of hours that management is willing to pay for – also remained flat.

All of it seemed enough to convince much of the investment punditry that the lackluster report would likely mean that the Federal Reserve would now postpone any move to scale back its major asset purchases, known as quantitative easing, into 2014 because that action had been predicated upon a steadily improving economy.

As Barclays wrote in a note to clients on Tuesday, “In light of the moderate tone of the September employment report, we have pushed out our expectation for the first Fed tapering in the pace of asset purchases to March 2014 from December 2013.2

And yet – this wasn’t necessarily an open-and-shut case. For starters, the jobs report did have a couple of rays of light, including a decline in the unemployment rate among teenagers, which has been a particularly pesky issue.

Indeed, for some economists, a “meh” report hasn’t necessarily changed prognosis on the timing of the Fed tapering its purchasing. As John Rydell chief economist at RDQ Economics told the New York Times, “When they chose not to taper in September, it was still the case that most participants thought it would start by the end of the year. Does this jobs number necessarily push that back? I think there’s still a vigorous debate to be had. It’s not a foregone conclusion.”

And here’s another thought: Is it possible we’ve reached a point where sluggish jobs reports are baked in for the foreseeable future – to the point where an upside surprise in any of 2013’s remaining months will act like a whipsaw for taper talk?

As Michael Santoli noted last week for Yahoo Finance, the market has arranged itself under the prevailing belief that the Fed will be late to taper, not wanting to change its course until the economic recovery is more unequivocal. That, in turn, has been a key element in driving stock prices to all-time high.

Now, throw into that backdrop the idea, as the Times pointed out, that the recent government shutdown is going to taint the jobs report figures through the end of this year. What happens to expectations of a Fed taper if – seemingly, out of nowhere – the employment report knocks one out of the park?

One possibility is a boost for assets that could be expected to perform well if the Fed pulls back – essentially, in a higher longer-term interest rate environment.

An alternative to consider is the Fed Tapering motif, which is up 7.0% in the past month, and has gained 10.1% since its inception in September. During that same timeframe, the S&P 500 has gained 3.7% and 7.6%, respectively.

1Dean Baker, “Unemployment Edges Down as People Continue to Leave the Workforce in September,” Center for Economic and Policy Research (cepr.net), Oct. 22, 2013, http://www.cepr.net/index.php/data-bytes/jobs-bytes/jobs-2013-10.

2Catherine Rampell, “Weak Job Gains May Cause Delay in Action by Fed,” nytimes.com, Oct. 22, 2013, http://www.nytimes.com/2013/10/23/business/economy/us-economy-added-148000-jobs-in-september.html?pagewanted=1&hp.