Federal Reserve Chairman Ben Bernanke has said that the future of quantitative easing is “data dependent,” which means the same can be said for the near-term fortunes of the financial markets.
While the initial shock of a potential tapering has worn off in recent weeks, the issue is sure to come back into the headlines as the Sept. 6 Bureau of Labor Statistics Employment Situation report approaches. The perceived influence this jobs report will have on the Fed’s QE policy makes the jobs data even more important than usual.
In fact, it might be the most important number we’ll see this year.
The critical nature of the jobs report stems from the calendar: the Federal Open Market Committee meets again on Sept. 17-18, which makes the Sept. 6 number the last employment data released prior to that meeting.
While one number is unlikely to be the key factor that tips the Fed’s final decision on tapering in either direction, it’s doubtful the markets will take it that way.
Tapering Isn’t a Done Deal
One reason for this is the lack of consensus on exactly what the Fed has in store for its September meeting.
In a poll of 54 economists released on July 23, only half believed that the taper would begin in September. Granted, 27 economists don’t make a market, but the data released since the poll was taken have only served to muddy these already uncertain waters. This indicates there is plenty of room for consensus to shift in the weeks ahead — in terms of whether a taper occurs right away, as well as by how much.
Or as Barclays wrote in a research note on Friday, “The August employment report, and the data flow between now and then, will likely prove decisive for the policy outlook.”
The Sept. 6 jobs report therefore has the potential to fuel meaningful shifts in opinion regarding the outlook for QE, and by extension, financial market performance. If the number comes in too far above consensus, the markets could take a hit as investors raise their estimates for the extent of the September taper. If it comes in too low, markets could stage a relief rally on the expectation that the taper could be delayed until the October or December meetings — most likely the latter.
Some might argue that a Sept. 18 tapering announcement is a foregone conclusion that is already reflected in the markets, but this isn’t necessarily the case.
Consider this comment from St. Louis Fed President James Bullard’s presentation from Friday, Aug. 2 (available here). Under the heading “Tapering: Pros and cons,” he wrote: “I will conclude by suggesting that the Committee needs to see more data on macroeconomic performance for the second half of 2013 before making a judgment on this matter.”
This indicates that the Fed is keeping a close eye on what happens between now and its next meeting before reaching a conclusion — illustrating that the decision does in fact remain dependent on incoming data.
The Market Impact
What does this mean for the markets? Barring unforeseen events, expect an environment of lower trading volume, reduced volatility and — at best — limited upside the closer we get to the Sept. 6 jobs report date, as investors look to square positions and avoid big bets ahead of the news.
Late August already is a time characterized by low trading volume, and this year it’s likely to be even slower as investors hunker down ahead of the jobs data. The following week, which begins on Tuesday, Sept. 3, could also feature sleepy conditions and range-bound, directionless trading as the report gradually begins to dominate the landscape.
The Bottom Line
This sort of event-driven market volatility might not matter to long-term investors, but more active traders should take note: Opportunities are likely to be increasingly sparse in the month ahead.