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Will US job numbers pave the way for Fed tapering?


Newsletter: The Road to Recovery

Will US job numbers pave the way for Fed tapering?

The Federal Reserve is hurtling towards an announcement that it will soon scale back its massive stimulus programme, and Friday’s jobs report could set the stage for such a move as early as November.

The US central bank has said it would buy $120bn of Treasuries and agency mortgage-backed securities each month until it saw “substantial further progress” on two goals: inflation averaging around 2 per cent and maximum employment.

Surging consumer prices have long meant the first of these goals has been met, but many Fed officials have signalled they wanted to see further gains in employment before moving ahead with plans to begin reducing or “tapering” support.

Fed chair Jay Powell said at the most recent meeting on monetary policy that the jobs threshold was “all but met”, and that he did not need to see a “knockout, great, super strong employment” report for September “to feel like that test has been met”.

Economists surveyed by Bloomberg expect 488,000 new positions to be created for the month, more than double the surprisingly weak job gains seen in August. Just 235,000 roles were added then, sharply lower than the 1m or so jobs created in June and July and far short of the 733,000 positions expected by economists.

Analysts said the slowdown in jobs growth stemmed not only from surging Delta cases, which hampered business activity, but worsening labour supply shortages.

Patrick Harker, president of the Philadelphia Fed, said at a recent event that the Fed’s purchases “were necessary to keep markets functioning during the acute phase of the crisis. But to the extent that we are still dealing with a labour force issue, the problem lies on the supply side, not with demand.”

“You can’t go into a restaurant or drive down a commercial strip without noticing a sea of ‘Help Wanted’ signs. Asset purchases aren’t doing much — or anything — to ameliorate that,” said Harker. Colby Smith

Will the pound continue to weaken?

Sterling tumbled to its lowest level of the year last week against a resurgent dollar as investors worried that the UK’s supply chain crisis could undermine the strength of the country’s economic recovery.

The declines came despite a sharp rise in UK government bond yields after the Bank of England surprised markets by saying it could raise interest rates as soon as later this year to tame high inflation.

Sterling rebounded slightly from last week’s 2021 low against the US dollar of $1.341, ending the weak at $1.3562. 

Line chart of $ per £ showing Pound slides to one-year low against resurgent dollar

But the decline in sterling has left it looking undervalued, according to Mark McCormick, head of FX strategy at TD Securities, who is betting on its rebound against the euro.

“The market narrative liked the pound on a so-called hawkish BoE outlook, then hated it as inflation runs out of control,” he said. “The truth probably lies somewhere in the middle.”

Some analysts think the pound’s recovery against the dollar may be trickier. The dollar hit its highest level in more than a year against a basket of other currencies last week, boosted by the prospect of the US Federal Reserve tightening its monetary policy and concerns about global growth, which tend to drive investors towards the relative safety of the world’s reserve currency.

“I don’t think the dollar will retreat significantly until you get an improvement in risk appetite globally,” said Jane Foley, head of FX strategy at Rabobank. “For that you need stronger growth prospects, and at the moment the direction of travel is towards weaker data.” Tommy Stubbington

How will Australian policymakers respond to surging house prices?

Australia’s central bank will almost certainly keep rates on hold when it meets on Tuesday, with plunging iron ore prices and softer retail sales and jobs data offsetting the impact of a scorching housing market.

“The consensus is no change on rates and nothing on quantitative easing,” said Shane Oliver, AMP Capital chief economist.

At its meeting last month, the Reserve Bank of Australia announced it would cut bond purchases from A$5bn a week to A$4bn but extend the programme until “at least mid-February 2022”, citing “increased uncertainty” due to the outbreak of the Delta variant of Covid-19.

But a group of Australian regulators, including the RBA, said last Wednesday that house prices were “still rising briskly in most markets”, with credit growth likely to remain strong.

The spectre of credit growth outstripping increases in household income would “add to the medium-term risks facing the economy”, even though lending practices remained “sound”, said the regulators.

Over the medium term, a Bank of America research report said Australian economic data was expected to “deteriorate” to “reflect the lockdowns” but a “solid rebound is expected thereafter”.

The RBA has said it would not increase its interest rate until inflation was “sustainably” within a 2 per cent to 3 per cent target range, a condition it says was unlikely to be met before 2024.

Oliver said the mixed data coming out of the region underpinned that scenario. “The fall in the iron ore price, the weakness in China and worries about Evergrande all support the Reserve Bank in taking a dovish approach on interest rates,” he said. Anthony Klan



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