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Another Strong Jobs Report, Another Boost for Taper Talk

13 December 2013 in Trading Ideas

To taper or not to taper, that is still the question.

And one that is certainly stuck in the minds of investors attempting to read the tea-leaf comments by Federal Reserve officials regarding how soon the brake may be applied to Fed’s bond-buying program to hold down interest rates.

In a piece last Monday by the New York Times, the Fed’s message seemed to be: “Hey, what’s the hurry?” The Times noted that Fed officials are in no hurry to ease the program, and are likely to postpone any cuts until next year.1

Charles L. Evans, president of the Federal Reserve Bank of Chicago, told the Times that he was certainly nervous about the sluggish pace of inflation, and that he’d like to see “a couple of months of good numbers,” with regard to last Friday’s jobs report.

Others could suggest we’ve just seen them. The Labor Department said Friday that the economy added 203,000 jobs in November after adding a revised 200,000 in October, the first time we’ve accomplished that feat since November-December 2012.2

In addition, the unemployment rate dropped 0.3 percentage points to 7.0%, and unlike other recent declines, the figures came from a legitimate increase in employment, rather than a statistical outlier due to people leaving the active work force in droves. The employment-to-population ratio rose 0.3 percentage points to 58.6%, which reversed an identical decline of a month earlier.

Just as important an indicator of possible future job growth was the uptick of 0.1 hours in the length of the average work week.

Also, the number of people working part-time involuntarily fell by 345,000.

The results prompted other Fed officials to suggest that Taper Time, at least the beginnings of it is now. As Bloomberg reported, St. Louis Fed President James Bullard suggested that a small taper now (meaning, at the Fed’s open-market meeting next week) would recognize labor-market improvement while also giving the central bank the opportunity to monitor inflation in the first half of 2014.3

Fed Tapering motifDallas Fed President Richard Fisher was a little more blunt: Asset purchases, he said, should be dialed back as soon as possible in an economy that doesn’t need any more monetary stimulus.

Incidentally, 34% of economists in a Bloomberg survey now think the Fed could elicit a taper next week, up from 17% when polled a month ago.

Investors also seem to be rallying around stocks that could benefit from a Fed easing and a further rise in interest rates. Our Fed Tapering motif has gained 1.4% in the past month. In that same period, the S&P 500 is down 0.7%.

Since its inception in early September, the motif has increased 12.1%. The S&P 500 is up 8.9%.

To this point, there has been no shortage of talk regarding when a taper plan should begin but so far those who in the business of speculation have been unable to see those opinions turn into fact.

1Binyamin Applebaum, “Fed’s Plan to Taper Stimulus Effort Is Not Expected Until Next Year,” nytimes.com, Dec. 8, 2013, http://www.nytimes.com/2013/12/09/business/economy/feds-plan-to-taper-stimulus-effort-not-expected-until-next-year.html?_r=1&, (accessed Dec. 10, 2013).

2Dean Baker, “November Job Growth Pushes Unemployment Rate Down to 7.0 Percent,” Center for Economic and Policy Research, Dec. 6, 2013, http://www.cepr.net/index.php/data-bytes/jobs-bytes/jobs-2013-12, (accessed Dec. 10, 2013).

3Andrea Wong and Joseph Ciolli, “Dollar Rises Versus Yen as Fed’s Bullard Says Taper Odds Rise,” Dec. 9, 2013, http://www.bloomberg.com/news/2013-12-08/dollar-strengthens-for-second-day-versus-yen-on-qe-tapering-bets.html.