With Friday’s upbeat U.S. jobs report exceeding expectations, market players are now saying that the Federal Reserve could begin tapering its quantitative easing program as early as this September.
The economy added 195,000 jobs in June, according to the Labor Department report released Friday, and the unemployment rate was unchanged at 7.6%. Although the number of long-term unemployed was essentially unchanged at 4.3 million, the report stated that June’s increase is in line with the average monthly gain of 182,000 over the last year.
Wall Street had expected the economy to add only 165,000 jobs last month, so the much larger number of jobs created in June along with an upward revision for April and May has encouraged the belief that the Fed will start to put the brakes on its bond-buying program before the end of the year.
“The one weaker-than-expected part was the unemployment rate being flat at 7.6%—consensus was down a tenth—but overall the report has a strong tone,” wrote Jim O’Sullivan, chief U.S. economist with High Frequency Economics in Valhalla, N.Y. “Employment growth continues to look more than strong enough to keep unemployment trending down—even though the rate was only flat in June—and probably more than strong enough to lead to Fed tapering starting in September.”
O’Sullivan noted that there will be two more employment reports before the September Federal Open Market Committee (FOMC) meeting.
Rick Rieder, portfolio manager of BlackRock’s Strategic Income Opportunities Fund (Class A: BASIX) and co-head of BlackRock’s Americas fixed-income unit, said the 195,000 boost in payroll jobs for June promotes the concept of “a solid, but not spectacular, U.S. growth story” that is now seeing labor market improvements follow alongside broader economic gains.
Along with improved data on income levels and better consumption numbers, Friday’s report gives the Fed the confirmation to move forward with its reduction in large-scale asset purchases, “and we think that this will begin in September and that markets are clearly pricing this possibility in today,” Rieder wrote in a comment. “We think that the Fed will be very deliberate in moving interest rates, but will be more aggressive in reducing a QE program that had grown too large in scale relative to the benefits it afforded the economy.”
On how he is positioning BASIX, which is BlackRock’s flagship fixed income fund, Rieder said he continues to like keeping interest rate sensitivity very low, and continues to believe the dollar will strengthen, especially given recent moves by the European Central Bank and Bank of England as well as the “clearly easy policy” in Japan.
“We also continue to favor less interest rate sensitive assets in our funds such as floating rate, real estate oriented debt (like CMBS) and front-end European paper, while keeping assets like investment grade credit (with its long duration) to a nominal position,” Rieder wrote.
Markets Remain ‘Extremely Sensitive to Swings in the Data Flow’
Meanwhile, Bank of America Merrill Lynch U.S. Economist Michelle Meyer said the June employment report was an across-the-board positive, but other data between now and September will be closely watched by the FOMC.
“If the Fed were basing policy solely on the employment report, September tapering is a done deal,” Meyer wrote in a comment titled, “Jobs: Friday fireworks.” “We believe, however, that the Fed will be looking at a range of activity indicators, which could postpone tapering until December. We believe it is a close call, leaving the markets extremely sensitive to swings in the data flow.”
Warning that the markets have been over-reacting in the last six to eight weeks, John Canally, investment strategist and economist for LPL Financial, noted that more taper talk will come next Wednesday when Fed Chairman Ben Bernanke speaks before the National Association of Business Economists.
“The jobs report solidified that the Fed is on target to begin tapering in September. There was some disagreement among market watchers before this, with some thinking tapering wouldn’t begin until December,” Canally said in a phone interview with AdvisorOne.
But with U.S. jobs growth averaging 200,000 a month this year, the Fed can now feel comfortable with tapering, he added. “That’s pretty decent job growth, and above where the market thought it was, but in line with where the Fed thought it was. Now the market needs to understand that tapering isn’t the same thing as tightening.”
Read PIMCO’s Gross: Don’t Abandon Ship in Turbulent Market at AdvisorOne.com.