It’s been a very quiet start to the European session on Friday, which is hardly surprising considering that one of the biggest US jobs reports this year will be released shortly before the opening bell in the US.
Up to about a month ago, most investors had written off the possibility that the Fed could taper its asset purchases at the December meeting, following an apparent change of heart from them in September, a government shutdown that lasted almost three weeks and a near-default from the US on its debt.
It was difficult to know what kind of impact this would have on the economic data and many thought it would be at least a few months until we saw it cleansed of the temporary distortion that it would bring.
That was not the case though and the data we’ve seen so far for October and November has suggested that the economy preformed very well throughout, and after, the shutdown.
In fact, it improved on the months leading up to it.
Improving Jobs Data May Encourage Tapering
The most important figures of these though, as far as the Fed is concerned, are the ones contained in the US jobs report.
The October report was far better than all expectations, as 204,000 jobs were created and unemployment rose only marginally to 7.3%, which will be entirely due to the furloughed government workers that have since returned to work.
If we see a similar performance in the November jobs report today, I believe the Fed will seriously consider a small reduction in asset purchases at the next meeting in two weeks time.
And I’m sure I’m not alone in that thinking.
All you have to do it look at the activity in gold, US Treasuries and indices this week when we’ve seen positive US data to see that traders are hedging more against a possible taper.
And this will become even more priced in today if we see another strong jobs report.
Revisions Add to the Picture
It’s not just November’s figures that we need to pay attention to though.
The revisions to past non-farm payrolls figures are also extremely important, as it’s only because these were revised higher last month that we’re even talking about the possibility of a taper this month.
If we see a strong figure for November, but previous figures are revised lower, the Fed’s decision will be made much harder and it may suggest to them that the evidence isn’t there to suggest that the recovery is sustainable.
Unemployment and Participation Rates
A number of other parts of the jobs report will also play into the Fed’s decision next month, for example the unemployment rate.
The rate itself can be deceiving, however the participation rate that has impacted it a lot in the last year could tell us a lot about people’s view on the recovery in the US.
If people are continuing to drop out of the labour market, it means they have no faith in the recovery.
This is not what the Fed wanted when it set its unemployment thresholds last year.
Personal spending and income is also important as it gives an indication about whether the recovery is being driven by Americans spending more because of improved earnings, which is sustainable, or by running up more debt, which isn’t.
Also we have the core personal consumption expenditure index, the Fed’s preferred measure of inflation, which is expected to show inflation falling slightly to 1.1%, well below its 2% target.
Ahead of the open we expect to see the S&P up 7 points, Dow up 65 points and the NASDAQ up 15 points.
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