Friday’s U.S. jobs report was stronger than pre-ADP consensus, only because of several pundits pushing the idea of 250,000 non farm payrolls (the whisper number seemed to be around 225,000). Thus, the 203,000 NFP was well within the range of prediction. The falling rate to 7.0% was a stronger sign of growth, especially when coupled with a rise in the participation rate and a fall in the U-6 rate. Average hours worked gained and wages increased by 0.2% per hour. All in all, it was the most positive data in many months. Manufacturing was a pleasant surprise as 27,000 jobs were added along with 17,000 jobs in the construction sector.
Supporting the gain in U.S. manufacturing jobs was the employment data from Canada. The Canadian report was not as robust as the U.S. but manufacturing jobs in Canada increased by a healthy 24,900 though construction jobs up North fell by 17,000. The fall in Canadian construction jobs is a good thing as the government is trying to reduce the housing boom through macro prudential tools (reducing the amount of bank loans to the housing sector). The positive data provides Chairman Bernanke with enough cover to begin the tapering of the QE program. Here is why the Bernank should begin tapering:
- All of the Fed research now questions the impact of continued bond purchases on the economy. Governor Jeremy Stein and others have questioned the positive impact of ongoing QE and provide academic proof that the FED has helped to create a misplacing in term risk of the debt markets;
- There are rising concerns about how to contract the Fed’s balance sheet once the economy begins to gain traction (as addressed last week by Simon Potter, the head of the Fed’s trading desk and System Open Market Account (SOMA)). The Fed is worried about the massive reserves leaving the Fed account and making their way into the general economy. The Fed wants the markets to believe it can control the reserves through reverse repos, but the present tests are in small amounts;
- Chairman Bernanke has been touting the role of FORWARD GUIDANCE as a more powerful tool than QE at the present level of the zero-based and a massive balance sheet;
- The declining Federal budget deficit means that the Fed is buying too much of the Treasury debt and is keeping the needed asset classes from the pension funds and insurance companies who need the highly rated government securities to meet their needs. Even if the Fed lowered its monthly buys to $50 BILLION, it would still be adding $600 BILLION a year to its balance sheet, depriving the banking market of needed high quality collateral; and
Beginning the tapering before Janet Yellen becomes Chairman will mean that the “difficult and unpopular decision” will have been taken by the departing Chairman. Bernanke can seize the moment and proclaim that the QE program is ending because of its great success in preventing a massive liquidation of U.S. assets and ultimately aiding the economy in return to a more robust growth path. Declare victory Ben and remove a difficult decision from the incoming Yellen administration.
Now I am predicting that the FED will announce a TAPERING AT THE DECEMBER MEETING and I am assigning a 90% probability to my prediction for I do not adhere to Keynes’ tongue in cheek admonition, “WORLDLY WISDOM TEACHES THAT IT IS BETTER FOR REPUTATION TO FAIL CONVENTIONALLY THEN TO SUCCEED UNCONVENTIONALLY.” 2+2=5 demands that we succeed unconventionally.