Focus on US Labor Market Report – But no Signal for Tapering at next FOMC Meeting

The fear that the FOMC might start tapering in December is back after the release of the minutes of the October FOMC meeting. Thus, financial and commodity markets will focus on the US labor market data, which is scheduled to be released on December 6. However, we do not expect that this report would already tip the balance. From our point of view, tapering is more likely to take place later in 2014.

The minutes of the recent FOMC did not bring any real surprise. On the one hand, it should not have come as a surprise that reducing the volume of bond purchases was discussed. Also the preparation of markets that this event could take place within the next few months is not really new. Since the testimony in May, when Fed Chairman Bernanke pointed out that the FOMC might take this decision, there were always hints from FOMC members that the committee might make this decision at one of the next few meetings. There was no statement that tapering would be off the agenda. It is only a question of timing.

But on the other hand, the Fed always emphasized also that the decision to taper would be data dependent. During November, Fed Chairman Bernanke and his designated successor Janet Yellen both indicated that the economic situation of the US would not be stable enough despite some improvements. This pointed more towards no tapering in 2013.

Therefore, the crucial question is whether economic data has improved sufficiently to change the mind of the majority within the FOMC. The US labor market report for the month of October was surprisingly strong. The number of new jobs created exceeded the consensus forecast by far and also the numbers for the preceding two months had been revised higher. The government shutdown had not a significant impact on the labor market. For November, the consensus is looking for a smaller number of new jobs created at 184K, which is 20K below the October figure and also below the 12month moving average. It would also be far less than the number of new jobs created in November last year. Thus, the consensus is not looking for a particular strong number, which would probably tip the balance.

But the target of the Fed is not the number of additions to the non-farm payroll. All the statements refer to the unemployment rate, which is calculated from the household survey. In October, the unemployment rate edged up to 7.3%. For November, the consensus predicts that the unemployment rate would edge down again to 7.2%. However, the crucial factor is the labor force participation. A decline of the unemployment rate, which is driven solely by jobless workers leaving the working force could hardly been interpreted as an improvement of labor market conditions. It would be different, if a decline of the unemployment rate were accompanied by workers returning the workforce. Thus, one will have to scrutinize the labor market report carefully. But all in all, we do not expect that the labor market would be strong enough to tip the balance towards tapering at the FOMC meeting on December 18.

In September, the FOMC also argued with the increase of funding costs. After the yield on 10yr US Treasury notes came down from 3.0% to 2.5%, it rose again above 2.75%. This would be another argument against a decision to taper at this month’s FOMC meeting.

It is hard to predict in which direction the labor market report will surprise the consensus among Wall Street economists. Especially, it appears impossible to forecast, whether the focus of the markets will be more on the business or the household survey after the release of the data. But even in the case that the US labor market report were perceived as indication that the FOMC would not decide to reduce the volume of bond purchases this month, it is less likely that bond and precious metal markets would switch to a strong rally mode. Tapering is only a question of timing and thus, the uncertainty about the specific date remains in the markets until the final decision will be made.