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The most significant economic report out this week is Friday’s official government employment data, which may provide the most useful clues as to the Fed’s likely action at its next policy meeting. The market has today focussed on ADP’s proxy version of private payrolls, in the assumption that it presages the official data.
ADP reported growth of 215,000 in private payrolls in November, far higher than the consensus estimate which called for just 185,000. The sell-off in stock prices on Wall Street suggests that market participants think we could see a similar result with Friday’s non-farm payrolls, which could force the Fed’s hand in scaling back its stimulus.
I would disagree with this line of thinking for a number of reasons. The ADP report has had a poor correlation with official employment data in general this year, with last month being a nadir : ADP reported a decline in payroll growth for October, followed by the government reporting a big jump. This is reflected in ADP's amendment of October’s figure by a whopping 54,000, hiking the 130,000 originally reported to 184,000. Herein we have the problem with ADP’s data. Rather than straight reporting of actual numbers, they are more an estimation, drawn from surveys.
We also have to imagine what the Fed would need to see in order to be sufficiently convinced that improvements in the economy, particularly the labour market, will be sustained. The consensus estimate is that the unemployment rate will drop from 7.3% to 7.2% in November.Let’s say that the actual result comes in better than this, and unemployment drops to 7.1%. The unemployment rate in September was 7.2%, increasing in October to 7.3%.
I would argue even a drop to 7.1% for November would not yet suggest a trend of ongoing improvement , at least not enough to sway the Fed from taking a better-safe-than-sorry stance of delaying tapering for long enough to see if the rate improves again in December (the data for which would not be available until January, and hence too late for the December FOMC meeting).
Furthermore, the Fed will not solely be looking at the labour market. Today’s ISM non-manufacturing index, which showed a slowing in activity in November, will not have escaped their attention. Interestingly, the employment component of this report dropped from October, which muddies the waters further ahead of Friday’s payrolls report.
In short, while I think a December taper is not an impossibility, I think it remains very unlikely.
An opposing view appears to be in the ascendancy today in the financial markets, however, and by early afternoon in New York, the Dow Jones had fallen triple digits for a second successive day, dropping 118 points or 0.75% to 15,796, while the S&P 500 lost 0.68%.