Markets say Fed's taper decision hinges on tomorrow's jobs numbers

09/05/2013 7:46 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Global financial markets think tomorrow’s U.S. jobs numbers for August will be the clincher for the Federal Reserve in its decision to begin tapering off purchases—or not--of Treasury bonds and mortgage-backed assets at its September 18 meeting. Right now, it looks like the U.S. bond market thinks a strong jobs number tomorrow will be a green light for the beginning of a taper. The yield on the 10-year U.S. Treasury has climbed to 2.98% today. (That leaves the 10-year yield just short of the 3% level that I said earlier today yesterday http://jubakpicks.com/2013/09/05/the-yield-on-the-10-year-treasury-inches-toward-3-i-think-thats-likely-to-set-off-an-over-reaction-in-bond-and-stock-markets/ might mark a short-term break/panic in the markets that would be good for a long trade on a drop.)

The consensus among economists surveyed by Briefing.com is that the U.S. economy added 177,000 jobs in August. That would be up from 162,000 in July. And that would keep the upward momentum going in the jobs numbers—pushing the number of jobs added in the last year to 2.3 million—and would probably leave the unemployment rate at July’s 7.4%.

Would that be enough to convince the Fed that the economy is strong enough to handle a modest reduction in the Fed’s program of buying $85 billion a month in Treasuries and mortgage-backed assets? We’re all guessing at this point, but the market’s guess, judging from the upward creep in yields, is that 177,000 or so net new jobs would be enough to usher in The Taper.

A lot will depend on the Fed’s read on the strength of the economy in 2014—the jobs number for August is, after all, a backward looking measure. There the recent strength in the Purchasing Manager’s Index for the manufacturing sectors in the United States, China, and Europe is the strongest argument for a Fed decision to begin tapering in September.

A decision on The Taper itself, a climb in yields to 3%, battles over the federal budget and the

debt ceiling are likely to make the market very nervous in the second half of September and into October. But beyond that the very modest size of any initial taper—a reduction in purchases to $75 billion from $85 billion is a likely dimension—could well produce a “That’s what we were worried about?” reaction and would power a traditional end of the year rally.

Right now it’s wait and see what tomorrow’s data brings.

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