Tensions remain high in the upcoming week as last Friday’s Employment Situation Report failed to clearly suggest that the Fed would legitimately consider taping asset purchases during the June 18th-19th meeting. It also failed to clearly suggest the Fed should table the tapering discussion until labor markets are clearly stronger. 175k payrolls may not be historically consistent with healthy expansion, but the Fed’s not looking for healthy expansion as much as it’s looking for traction and the sense the economy is moving under its own power.
The more frequently NFP prints over 150k, the more likely it becomes that the Fed decreases the doses of QE by modest amounts until such a thing can be achieved with no QE at all. This could be a LONG process, and even if it doesn’t stretch into 2015 or 2016, it will certainly be much longer than the 3-5 that concern the more vocal critics of tapering’s effect on rates.
The distinction is between ending QE and tapering QE. It won’t likely end in 2013, but it will likely be tapered if data continues the pattern of tepid improvement. With that in mind, all eyes are already on next week’s FOMC Meeting/Announcement in order to see how the Fed addresses the topic. Will any mention of taping be included in the Statement itself, or will that job be left to the Bernanke Press Conference afterward? Will the staff projections have an oversized impact if they noticeably shift the anticipated time frame for policy firming?
Whatever the case, the bottom line is that Bernanke said in March that the Fed had to make sure recently stronger data wasn’t temporary. The 175k Payrolls print last week with minimal revisions and to May’s similarly even-keeled previous report mean that private payroll creation has gone 8 months over 150k–something it hasn’t done since 1999! Considering that Bernanke said in March “labor market improvements would need to be sustained for a number of months” in order to begin small, periodic adjustments to bond-buying, it’s almost guaranteed that he’ll get a question about this next week, to the tune of: “so how about now?” It’s further guaranteed that his answer to that question will be a market mover–one that we continue to wait for this week despite a moderate calendar of activity.
Chart of the day: NFP day (right-most green candle) failing to break either side of the pre-NFP range, ushering us into the current week with more uncertainty (last red candle is early 6/9 trading):
2nd chart of the day: a more optimistic way to look at the recent range (still major challenges suggested at 2.04-2.07, even if not shown on the chart):