Payrolls Report Changes Nothing About Fed’s Next Move

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.

Compared to the consensus among economic
forecasters of 170k, today’s NFP increased by 175k.  The previous
report was revised 16k jobs weaker, and the report before that 4k jobs
stronger, for historically minuscule net revisions of -12k.  Together with those revisions the 5k gap from forecasts is not a statistically significant
variation to label the report anything other than “as expected.”

There was
some talk in the media and among analysts of whisper numbers in the 110-150k
range.  Moreover, human nature as well as the nature of financial markets
favored a lower number  after an incredibly strong report previously and
an incredibly weak report before that.  Today was to be the warm bowl of
porridge in that regard, and it turns out forecasters did a great job of
honing in on that warmness at 170k vs the more emotional consensus around 130k.

It bears brief mention that yesterday’s anomalous gyrations drew more
than a few comments that wondered if something about the NFP outlook had
changed for some reason.  Any sort of “leak” from the BLS
has been and continues to be highly unlikely.  But even if discussion of
potential leaks was only in jest, when we see a massive bond market rally the
day before NFP, in high volume, and decidedly lacking in satisfying
explanations, it’s enough to cause some doubt about any potential ties
to the upcoming data. 

That may have helped facilitate some of yesterday’s
strength, or rather, may have sparked doubts that helped yesterday afternoon
from having a more sincere correction back to a pre-NFP defensive stance. 
“Somewhat lulled into a false sense of security by an enigmatic
mega rally the day before NFP,” I might say. 

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

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. 

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:

“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.” 

Price stability is a factor as well, but the Fed has other,
better ways
to control that if the economy can get off its metaphorical
hospital bed and walk to the bathroom for the first time since 2008.  Tapering
is NOT
something the Fed’s going to do in response to the economy
improving.  Rather, it’s something the Fed’s going to do if it can be done
without making the economy weaker.  Regardless of how anyone would assess
potential “strength” in this latest jobs report, it at least showed
an economy that’s not getting any weaker. 

Fortunately, that fact has been very well priced-in to markets since
May 10th, and markets were doing a tremendous job of trading according to that
consensus.  Today’s losses are made worse by yesterday’s somewhat freakish
improvements.  This is why I said that yesterday
changed nothing
.  That article leaned heavily on assumptions about
the range created on 5/28 and 5/29.  Since then, bond markets consolidated
from the lows and highs of that 2-day period (more consolidation in Treasuries,
more falling back to the lows in MBS). 

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

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