Fed is in no urge to taper in September

At the beginning of each month, the focus of international financial and commodity markets is on two sets of economic data: the purchasing manager indices of various countries and the US labor market report. However, the reaction on strong PMIs could vary as the Fed prepared the markets it might start tapering. But the recent data does not point to an urge for reducing the monetary stimulus.

One of the major worries in the first half of this year was the slow-down of economic activities in China. However, the PMIs for the Chinese manufacturing sector point to accelerating economic activity in China. The official manufacturing PMI rose stronger than the consensus among economists predicted and increased to 51.0 from 50.3 in the preceding month. Financial markets focus more on the HSBC PMI, but also this index increased stronger and surpassed the 50 threshold. Thus, also this PMI points to economic expansion.

The Chinese PMI data pushed the prices of base metals higher. However, towards the middle of the week, base metals pared most of the gains. Thus, the impact of better than expected Chinese data had only a limited impact on base metals.

Also in the US, the ISM manufacturing PMI surprised the consensus of Wall Street economists. Instead of declining, the PMI rose further from 55.4 to 55.7. Even stronger was the surprise in the case of the service sector PMI, which rose to 58.6 from 56.0 in the month before, while the consensus expected a decline to 55.2. However, in the case of the US purchasing manager indices, a further increase is not necessarily welcome in financial and commodity markets, especially among the fixed income investor. But also the precious metals reacted negatively. The reason is of course the pending FOMC meeting and the fear of tapering the bond purchase program.

The improvement of the PMIs is a positive indication. But the US economy is far from overheating. Even despite the recent upward revision of GDP growth in Q2, the US economy expands only at a modest pace. Also the capacity utilization rate, which was in July lower than at the end of last year, does not indicate any inflationary pressure in the pipeline. Furthermore, the preferred inflation gauge of the Fed, the core PCE deflator is far below the target of 2% inflation rate. Thus, the rising PMIs don’t indicate that the Fed would have to hurry reducing the volume of monthly bond purchases.

The US labor market report is a mixed bag and also provides not an indication that the FOMC would have to act reducing the monetary stimulus at the next meeting on September 18, 2013. The unemployment rate edged down to 7.3% while the consensus expected an unchanged rate of 7.4%. But as the household survey shows, employment did not increase in August but declined. Also the number of unemployed persons declined on a seasonal adjusted basis. Nevertheless, the lower unemployment rate was mainly the result of a decline of the labor force. The number of persons not in the labor force increased. However, after the summer vacation season is over, some persons might look again for a job and join the work force. This could lead to a slight increase of the unemployment rate in coming months.

The non-farm payroll figures are also providing more support for no action at the forthcoming FOMC meeting. The number of new jobs created in August was 169,000 and thus, it was clearly below the consensus forecast. This figure is also only marginally above the number of new jobs originally reported for July. However, the biggest surprise was the downward revision of the July figure from 162K to only 104K. This indicates that the underlying trend of job creation might be much weaker during the holiday season that previously assumed. Furthermore, it provides a hint that also the August non-farm payroll figure could be subject for a stronger downward revision.  

The Fed always stated that a decision on tapering would be data dependent. Furthermore, the Fed criticized rightly the Bank of Japan for reducing the monetary stimulus too early and the economic problems in Japan now last for already one generation. Thus, the FOMC would be well advised to wait a bit longer with reducing the volume of bond purchases. Nevertheless, it could not be ruled out that the FOMC already starts to taper this month. But then, it is purely because the markets expect the Fed to take this decision at the next meeting as one FOMC member stated recently.

The yield on 10yr US Treasuries briefly rose above the 3% level before edging down again after the labor market report. Given the outlook that the Fed will keep the Fed Funds target rate at the exceptionally low level well into 2015, the Treasury curve (3mth vs. 10yrs) is at an attractive level. Thus, we regard the current yield level at the medium- to long-term end of the curve as a good buying opportunity. But for precious metals, the rise in bond yields imply also increased opportunity costs. Thus, precious metals might have some resistance to rise further. Especially in the case of gold, which did not manage to stay above the 1,400$/oz level.