Will we see a December taper?

Friday night’s unemployment print and non-farm payroll number has certainly awoken one thing – speculation.

Back-to-back months of 200,000 payroll gains are a very solid step forward towards ‘sustainable growth’. It’s the first time in a year that 200,000 jobs have been added back-to-back, but what is more important is the unemployment rate dropping to 7%.

This is the lowest print in five years, and it’s a level some believe is low enough to trigger a taper point. The ‘official’ (which is more fluid than that) number the Fed wants unemployment at is 6.5% before they will move, however there are enough instances where board members have suggested 7% is low enough to start unwinding monetary stimulus (which the board has made clear it is completely separate from tightening where rates would be raised).

The employment data is a clear sign of optimism in the world’s largest economy. Hiring can be used as a forward indicator of confidence; it shows that expectations for demand are on the way up and a belief that the current ‘challenging’ conditions should alleviate over the course of the coming year.

What the print has also done is move estimates as to when tapering will begin, and it has invigorated speculation talk.

Bloomberg’s economist survey over the weekend showed a doubling in expectations that the Fed could start to slow debt purchase this month. The December read is coming from a low base, however with 34% of the economists surveyed calling for taper to start this month compared to 17% in November, it can no longer been dismissed as ‘no chance’.

The majority of those surveyed  however still believe the board will need a wider range of data that backs the ‘suitable growth’ call before the first trimming of purchases begins; you only have to listen to chairperson-elect Janet Yellen who believes the economy still isn’t living up to its ‘potential’ to understand the hesitation to change its current course. This suggests a December taper is still premature, but it will certainly raise speculation. I also see its second Fed mandate inflation  remains dead flat at 1.1% - well below the 2% level the board wants to see.

The data did lead to a steepening of the US yield curve; US ten-year treasury bills moved up 11 basis points last week and are now at the highest levels seen since September when tapering was all but a foregone conclusion, which lead to a rise in mortgage rates and was another reason the Fed held off tapering at the time.  

However, the market’s reaction this time around has been positive to positive data.  Having seen the reaction to the ADP non-farm data on Wednesday, which saw the Dow and the S&P contracting, Friday’s data saw the reverse. Although the US snapped an eight week winning streak at the close on Friday, the 1.1% gain to finish the week suggests the market is ready to embrace a trim in bond purchase.

Ahead of the Australian open 

Ahead of the open, the ASX 200 looks like following the trade leads from the US on Friday to break out of the current downtrend to start the week in the green, with the cash index pointing up 24 points to 5209 (+0.46%). BHP’s ADR is also suggesting the miner may support the rally by adding 25 cents to $37.00, even though iron ore eased on Friday.

I think trading will be light today; there is still tentative trading about and the fact that volumes (disregarding last Thursday’s trade) are still soft suggests the bullish sentiment of the last four months has lost some momentum and may remain this way for a few more days to come.

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