There is no other way for Federal Reserve officials to react to this morning’s Nonfarm Payroll numbers except to say wow while at the same time scratching their heads a little.
October’s 204,000 print, coupled to revisions in the previous two months by 60,000, and a most recent three month moving average of job gains that must be back up to or near the much prized 200,000 mark makes it hard not to conclude the labor market had more momentum and “substantial improvement” than previously assumed going into the fall.
And just as obviously this is putting a December meeting taper into the market’s expectations, and it would be hard not to assume it is going to be on table if these sort of upside data print surprises keep coming over the next few weeks.
*** We never dismissed December as a live meeting amid the QE forever chatter of what seems like a life time ago (see SGH 10/30/13, “Fed: Framing December”), but we are still just a bit gun-shy about proclaiming a December taper as likely or not. For one, the noise of one data point distorts the prized signal value in an upside surprise as much as a lower than expected print. ***
*** More importantly, even if the FOMC is strongly leaning as much as we think it is towards a taper, a lot still needs to happen for that elusive first taper to fall in place, the least of which is the Fed still has to find a consensus on what to do with its communications strategy: namely, how to frame the looming QE wind down with its forward guidance to temper a repricing of rates hikes being brought forward again or yields doing a redux of the summer spike. ***
*** Divorcing rate hikes from winding down QE will again prove difficult. But our sense is that data surprises like today will only add to the arguments to using a revamp of the thresholds — and as soon as the one year anniversary of their introduction at the December meeting — along with an emphasis on the low neutral fed funds rate, and another nudge down in the December Summary of Economic Projections for a first rate hike, some more first rate dots migrating into 2016, and an even flatter trajectory into 2016 (see yesterday’s SGH 11/7/13, “Fed: Those Two Papers”). ***
But for all the data-dependency talk by Fed officials, if there was ever a reason to seriously conclude it is time to wind down QE, it isn’t the data per se as much as it is the reaction of the stock market: the NFP’s indication of stronger job creation, more aggregate demand, and a better looking recovery that would suggest better profits that are generated by stronger top line sales growth rather than slashing the work force or crushing wages was met with a….sell off, because the better data means less QE.
The Fed, for better or worse but clearly the latter, has become the driver for almost every decision by investors or businesses alike. And besides the obvious distortions in the most basic market functioning that suggests, it is going to raise questions over how the transmission of eventual changes in policy will impact the real economy.
And it is the sort of question we strongly suspect is going to be directed at Fed chair-designate Janet Yellen next Thursday.