Today?s employment report was much weaker than expected. With a 169k gain in August payrolls combined with a net 74k downward revision to June and July employment was much weaker than the 180k consensus estimate (Nordea: 175k). Unemployment dropped to 7.3%, but the decline was entirely due to a 312k drop in the labour force, while employment according to the household survey fell 115k in August. Implications for the Fed?s bond purchases The weaker-than-expected employment report will obviously lower market expectations of tapering of the Fed?s asset purchases at the 17-18 September FOMC meeting. However, despite today?s disappointment we stick to our call that the Fed will opt for tapering its USD 85bn in monthly asset purchases later this month. With a standard deviation of 231k monthly changes in payrolls are notorious volatile and given the clear improvement being signaled by indicators like jobless claims, the ISM surveys and the Conference Board consumer confidence survey we believe the Fed will choose to see today?s disappointing payrolls data as more noise than signal. Moreover, the upcoming Fed leadership transition process also argues for tapering to start later this month rather than in December (with the lack of a press conference being the reason not to settle on the October FOMC meeting). However, considering today?s disappointment as well as the recent surge in bond yields, the recent softness in US housing indicators and the sharp emerging-market sell-off we expect a first cautious step, with the Fed reducing the pace by USD 10-15bn (USD 5bn in MBS; USD 10bn in Treasuries) to USD 70-75bn later this month. At the same time, we believe the Fed ? in an effort to prevent a continued surge in rates ?-will make a dovish reinforcement of its forward guidance, highlighting that tapering is not tightening and that actual tightening is still a long way away. However, we see only an outside chance of the Fed lowering its 6.5% unemployment threshold at the September meeting. But such a change could come later this year, if the Fed gets more concerned about the impact of a continued surge in bond yields. Such a change was discussed at the July FOMC meeting, reflecting the wide-held view among Fed officials that the recent decline in unemployment is likely exaggerating the improvement in the labour market due to a cyclical decline in the participation rate. We tend to disagree, but that’s a story for another day. In August the labour force participation rate fell to 63.2%, the lowest since 1978. Since just prior to the start of the current round of QE in September 2012, unemployment has dropped from 8.1% to 7.3%
↧