A trend that is growing worldwide
Shows policy’s been modified
From lower forever
To a new endeavor
That tapering must be applied
But what if the jobless report
Frustrates and the number falls short?
Will traders respond
By buying the bond?
Or will sellers keep holding court?
While today is a summer Friday, which typically holds little excitement except for the anticipation of the weekend, there is a bit more at stake this morning with the release of the July NFP report at 8:30. Given that we appear to be reaching an inflection point in policymaking circles, today’s data could either cement the changes that seem to be coming, or it could throw cold water on the entire process and take us back to square one.
The one thing that we have heard consistently over the past several weeks is that there is a growing desire by a widening array of FOMC members to begin tapering asset purchases. While Chairman Powell has not yet indicated he is ready, and a key lieutenant, Governor Lael Brainerd, was forceful in her views that it was way too early to do so, at least six or seven other members are ready to roll, with the latest being vice-chair Clarida and SF President Daly. But all of this tightening talk is predicated on the idea that not only has the inflation part of their mandate been achieved (gotten out of hand really), but that they have made progress on the employment part.
This brings us to today’s report. Since December, when the number was negative amid the second wave of the Covid outbreak, we have seen the following numbers: 233K, 536K, 785K, 269K, 583K, 850K. Historically, all of those numbers would be seen as strong, but obviously, given the 20 million job losses at the beginning of the lockdown last year, those numbers represent a very different situation now. A rudimentary look at the pattern would have you believe that today’s print, expected at 858K, is more likely to come at a much lower number, something like 250K-300K. Frankly, the thing that has me concerned is that the monthly survey is taken during the week that contains the 15th of the month. A quick look back at the weekly Initial Claims data for that week in July shows it was a surprisingly high 424K, a relatively high level given the prior trend. So, it could well be that a quirk in the data may result in a disappointing headline number. Remember, too, that the ADP Employment number was a MUCH weaker than expected 330K, so another potential sign of impending weakness. My point is that there is a very real opportunity for a negative surprise this morning.
The question is; if we do get a negative surprise, will markets ignore it? Or will they reevaluate their current belief set that tapering is on the way? As it happens, there are no Fed speakers scheduled for today, so it is not obvious that anyone will be able to clarify things in that situation.
Ahead of the number, markets continue to demonstrate their belief that tighter monetary policy is coming to the US. This is made evident by the dollar’s continuing strength, with the euro (-0.25%) testing the 1.18 level and stronger vs. all of its G10 and most of its EMG counterparts. It is evident in the continued backing up in Treasury yields, which after trading as low as 1.1275% Wednesday ahead of the Clarida comments, are now higher by 3.3 basis points this morning and trading back at 1.26%. While this is hardly “high” in a broad sense, the recent movement does demonstrate a clear trend
Equity markets seem to be somewhat less concerned, as yesterday, once again, US markets traded to new all-time highs. European markets are all modestly in the green this morning and only China, which continues to attack its own companies (the latest being Moutai, the food delivery service that is mooted to be fined >$1 billion for no apparent reason), has seen any real weakness in this space. But equity investors will continue to claim TINA until yields have really made a comeback. And despite the modest declines we have seen in bond prices today, we have actually seen negative yielding debt rise further, to $16.9 trillion, as of yesterday, hardly a sign of tighter policy.
So, overall, we are mostly given mixed signals by markets and policymakers and need to sort things out for ourselves. The first thing to do is look at what is expected this morning
|Average Hourly Earnings||0.3% (3.9% Y/Y)|
|Average Weekly Hours||34.7|
Between the widening spread of the delta variant, which is clearly disrupting supply chains around the world as well as causing more lockdowns and thus slowing economic activity, and the statistical noise and patterns, I have a feeling we are going to get a pretty bad number. A print below 500K, which is my guess, is likely to force at least some rethinking of the timing for tapering. Remember, while the Fed has admitted that some progress toward their goals has been achieved, their standard of “substantial further progress” remains “a ways away” according to Chairman Powell’s last comments. A low print today will certainly delay the tapering talk.
In that event, how can we expect markets to respond? Well, as the equity market sees all news as good news, it will clearly rally under the guise of easy money for longer. Bond markets are also likely to push higher with yields slipping as concerns over a taper in the near-term dissipate. But arguably, the biggest mover will be the dollar, which I believe has rallied sharply on the tapering talk, and if/when that fades, the short-term case for being long dollars will fade with it.
If I am wrong, and we get a strong number then the taper talk will intensify. This should lead to further bond weakness (higher yields), a dollar rally and likely test of the key euro support at 1.1704, and … an equity rally since that is what stocks seem to do.
Good luck, good weekend and stay safe