FOMC Taper Decision and October Jobs Report

We have finally arrived at the FOMC meeting that should unveil the Fed’s plans on tapering quantitative easing purchases. Meanwhile, the market has moved on to other matters, as in how fast will tapering be accomplished and when will rate hikes begin? Fed Chair Powell stated at the September FOMC meeting that his goal was to wrap up tapering by mid-2022. The market has other ideas and has priced in a June 2022 rate hike along with another before year-end.

Recall, the Fed was 50-50 on a single rate hike in 2022 at their last meeting. A June rate hike, like the market is predicting, can only happen if tapering is accelerated to say a March conclusion.  That will be the key drama at this meeting: clarity on when tapering will be completed, and some idea on how quickly rate hikes begin thereafter. In that regard, given the slowing in job growth, plateauing inflation numbers, we think the Fed will stick with its mid-2022 timeline with rate hikes only after a pause to assess the economic situation.

After the Fed meeting we’ll get the October jobs report on Friday. It’s expected to be better than September’s disappointing 194 thousand new jobs with 450 thousand predicted, but if it comes as forecast,  with yet another month of modest job growth, it will be another reason not to expect an accelerating tapering schedule.

 


Treasuries

Treasury Curve Today Week Change
3 Month 0.05% Unchanged
6 Month 0.06% Unchanged
1 Year 0.12% +0.01%
2 Year 0.51% +0.06%
3 Year 0.78% +0.01%
5 Year 1.21% Unchanged
10 Year 1.58% -0.08%
30 Year 1.97% -0.14%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.13%
6 Mo LIBOR 0.20%
12 Mo LIBOR 0.36%
Swap Rates  
3 Year 0.989%
5 Year 1.263%
10 Year 1.588%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Nov 1 ISM Manufacturing Oct 60.3 60.5 61.1
Nov 3 ADP Employment Change Oct 400k 400k 568k
Nov 3 ISM Services Oct 61.8 62.0 61.9
Nov 3 Factory Orders Sep -0.2% -0.2% 1.2%
Nov 3 FOMC Rate Decision Nov 3 0.0%-0.25% 0.0%-0.25% 0.0%-0.25%
Nov 5 Change in Nonfarm Payrolls Oct 400k 450k 194k
Nov 5 Unemployment Rate Oct 4.7% 4.7% 4.8%
Nov 5 Avg. Hourly Earnings Oct 0.4% 0.4% 0.6%
Nov 5 Avg. Hourly Earnings (YoY) Oct 4.9% 4.9% 4.6%

 


Top 5 Events for the Week

November 1 – 5, 2021

1.  FOMC Decision on Taper— Wednesday

After months of conjecture we have finally arrived at the FOMC meeting that should unveil the Fed’s plans on tapering quantitative easing purchases. Meanwhile, the market has moved on to other matters, as in how fast will tapering be accomplished and when will rate hikes begin? Fed Chair Powell stated at the September FOMC meeting that his goal is to wrap up tapering by mid-2022, and he has also been clear that the end of QE doesn’t mean rate hikes will follow closely behind.

The market, however, has other ideas and has priced in a June 2022 rate hike along with another before year-end. Recall, the Fed was 50-50 on a single rate hike in 2022 at their last meeting. A June rate hike, like the market is predicting, can only happen if tapering is accelerated to say a March conclusion.  That will be the key drama at this meeting: clarity on when tapering will be completed, and some idea on how quickly rate hikes begin.

It should be said that nothing since the September meeting really argues for accelerating the pace of tapering beyond earlier statements.  Inflation numbers, while high, seem to be plateauing with downticks in some of the monthly numbers.  The September jobs report was underwhelming and October is expected to be only marginally better. The one area that may make them anxious to accelerate is that other central banks are definitely moving in a hawkish direction but most central banks only have an inflation mandate and not employment like the Fed. In that we regard, given the slowing in job growth, we think the Fed will stick with its mid-2022 timeline with rate hikes following after a pause to assess the economic situation.

 

Source: Bloomberg

2.  October Employment Report- Friday

While a tapering announcement at the next Fed meeting is all but a done deal, the October jobs numbers will come after the meeting and thus be helpful only after the fact.  The October expectation is for a gain of 450 thousand jobs versus the disappointing  194 thousand in September with the unemployment rate dropping from 4.8% to 4.7%.  The broader underemployment rate continued lower in September dipping to 8.5% but it was as low as  6.8% in December 2019 and that is what the Fed will be looking to get back to before hailing the recovery as complete. Also, the Labor Force Participation rate fell in September to 61.6%. It was 63.4% prior to the pandemic so plenty of people remain outside the workforce compared to pre-pandemic levels. This is something else the Fed will want to see improve before launching rate hikes.

3. October ISM Services Index – Wednesday

Markets have been waiting for a hand-off of from the goods side of the economy to the services side and the latest GDP numbers did show that occurring but the Delta variant slowed some of that but with recent virus numbers declining, we are starting to see that occur.  If the October print comes as expected it will show a healthy services-side but still off the all-time high of 64.1 in July before Delta variant cases took off. The expectation is for a 62.0 read versus 61.9 in September.

4. ISM Manufacturing Index—Monday

The ISM Manufacturing Index will be the first to give us insight into October activity with the reports release due later this morning. The index is expected to post 60.5 versus 61.1 in September indicating the manufacturing sector is expected to remain in solid expansionary territory which has been the case since June 2020. The latest readings have plateaued around the 60-level but some of that is from of a lack of parts, namely chips for autos. With supply-chain issues still weighing on the sector these 60-level prints are likely to continue but looking through those temporary shortages the sector still seems very healthy.

5. Developments on Budget and Infrastructure Bills-All Week

We expect to read that negotiations on Biden’s reduced $1.75 trillion budget reconciliation bill are continuing this week, but with Biden in Europe expecting a breakthrough could be wishful thinking. Certain elements continue to be contentious for two Democratic Senators, Manchin (WV) and Sinema (AZ). One centerpiece of the budget bill was the amount of revenue it would raise to pay for much of the various social programs, but Manchin and Sinema both have problems with just about every revenue raising plan introduced. With tax plans running into roadblocks expect more trimming off the wish list.

 


Yield Universe

Source: SouthState Bank Trading Desk

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Published: 11/01/21 Author: Thomas R. Fitzgerald