Impressions of the state of the US economy are being shaped by economic data that has been fairly consistently positive, with the latest crop of reports today showing improvement in varying degrees, but with the most important report of the week still to come, it is not that surprising that investors are acting with some caution today.
Jobless claims fell 9,000 last week to 323,000, while a separate report from ADP calculated 176,000 workers were added to private-company payrolls in August. These are just the latest signs of recovery in the jobs market, but it is tomorrow’s non-farm payrolls report that investors will be most closely watching.
Some are billing this is as being the deciding factor in whether the Fed chooses to taper or not. I think that is going a little far.
Certainly Fed officials have said on numerous occasions that the decision will be based on incoming economic data, but they will certainly have been looking at a wider picture than just employment. I would expect CPI data ahead of the FOMC meeting to factor fairly strongly in the decision-making process, and we also have significant economic reports for retail sales, consumer sentiment and industrial production between now and then.
The trouble with trying to gauge what the Fed will do is that although we know their decision will be data dependent, we don’t know how they will judge that data, beyond the broad yardstick of knowing that weak data makes tapering less likely and vice versa.
For example, expectations for tomorrow’s report are for 178,000 to be added to payrolls in August, which would be a big improvement from July, but unemployment is expected to remain unchanged at 7.4%. If the numbers do play out this way, you could argue on the one hand, that the improvement in the labour market makes tapering more likely. But we don’t know if the Fed committee has an unemployment rate target in mind that is a pre-requisite for tapering. Would 7.4% be good enough? It’s that lack of clarity that is dogging the stock market.