More support to tapering expectations – U.S. jobs report preview
Head of Macro Analysis
Summary: The consensus economists look for a 900k gain in non-farm payrolls versus prior 850k, a decline in unemployment to 5.7% versus prior 5.9% and a pick-up in average earnings growth to 3.8% yoy in July. Even if tapering is not immediately around the corner, it is getting clearer that the Fed is preparing for it. A good July job report would further fuel tapering expectations.
There will be a strong focus on tomorrow’s official employment data given the emphasis from Fed chair Jerome Powell and company on upcoming job reports and its implication for taper timing. This is also the last job report ahead of Powell’s speech at Jackson Hole later in August where he may drop hints of what is coming next in terms of monetary policy.
Yesterday, the July ADP Employment report was out at 330k – sharply below the consensus of 650k. The big miss raised concerns about growth prospects. But we believe investors should not overreact to the data. Since the outbreak, the ADP Employment report has had trouble tracking the jobs report as hiring and layoffs have gyrated wildly.
We expect a good print to be released tomorrow. The consensus looks for a 900k gain in non-farm payrolls versus prior 850k. In turn, that would bring the unemployment rate down to a post-pandemic low of 5.7%. Some economists even forecast the non-farm payrolls to rise by +1m – which would be the fastest pace of job growth since last August if confirmed. As a note of caution, July is historically a seasonally weak month for hiring. But in these extraordinary times, everything can happen.
On the downside, we continue to see little scope for a major trend reversal in labour force participation. It is expected to hover around 61%. Labor scarcities reflects both cyclical factors (lingering impacts of enhanced unemployment benefits, fears over going back to work and becoming sick and school closures) and structural factors (the negative impact of an ageing population). This is well-monitored by the FOMC. But it is unlikely to have a major incidence on tapering timing, in our view.
Given data volatility and the unusual economic circumstances, it is not surprising senior Fed officials have very different views over tapering and the outlook for the U.S. economy. But this will lead to more market volatility, at least in the near term. In recent days, chair Powell, the influential vice-chair Richard Clarida and the newest Governor Christopher Waller all have sent very different messages to the market. Powell mentioned that « the labor market has a way to go » and that the unemployment rate of 5.9% understates the shortfall in employment. This suggests that Powell is ready to wait a bit longer before moving forward with tapering. Yesterday, Clarida indicated that rates could rise in 2023, thereby confirming the FOMC is widely divided over rate hike timing as well. According to the quarterly projections released at the FOMC meeting of 15-16 June, 13 out of 18 Fed officials are now considering a rate hike in 2023 and seven next year. Finally, Waller suggested that if July and August job growth was as strong as June (850k), he can envision tapering beginning in October and it could be faster than the $10bn a month seen previously.
All in all, this is bright clear we are getting closer every week to the tapering announcement. But we first need to navigate into more uncertainty, at least in the short term. The data-driven U.S. central bank needs more weeks, perhaps months, before it can make up its mind on the exact tapering timing. Be ready for a roller coaster market.