Tidings of comfort and joy

By Felix Salmon
December 6, 2013

It’s the season of good cheer, and the BLS is doing its bit to make econowonks happy in December. The last jobs report of 2013 is a great one; it now looks as though Fed chair Ben Bernanke is going to be able to go out on a high note, having brought the unemployment rate down to the key 7% level.

Even more happily, the news that we’ve finally reached that level has not sent the markets into a panic. The number is important because at one point the Fed was saying that it wanted QE to be finished by the time that the unemployment rate reached 7%; in reality, it turns out, the taper hasn’t even begun yet. Of course, the 7% number was only ever a ballpark — and it had to be a “good” 7% number, due to fewer unemployed people, rather than a “bad” 7% figure, due to discouraged workers simply dropping out of the labor force.

Still, today’s 7% is a good number: the employment-to-population ratio rose, by a heartening 0.3 points, to 58.6%, even as the unemployment rate saw that big drop to 7.0% from 7.3%. And the rest of the report was good as well: the broad U-6 unemployment rate, for instance, fell a whopping 0.6 points to 13.2%. Still too high, of course — but moving sharply in the right direction. There were more than 650,000 full-time jobs created last month, the number of employed people rose by more than 800,000, the number of unemployed people fell by 365,000, and even the amount of money that people earn each week rose by 0.7%. Just about everything, in this report, was as good as could realistically be hoped.

That said, it’s important not to extrapolate too much from a single jobs report, and especially not from month-on-month comparisons with October, the notorious garbage in, garbage out report which covered the period of (and was delayed by) the government shutdown. And if the BLS is going to be nice enough as to cheer us all up on December 6, I’m still reasonably confident that the Fed will continue the good news by keeping QE in place, at its current rate, on December 18. The taper, if and when it happens, is going to fundamentally change the government bond market: the Fed is by far the world’s largest buyer of Treasuries right now, and no one on the Fed board seems to be in any rush to start tapering by the end of the year. As Justin Wolfers says, looking at this chart, there’s no particular reason to start tapering right now.

The more important chart, however, is this one, which shows the 10-year Treasury yield over the course of this week. What it shows is that the market’s knee-jerk reaction to an unexpectedly strong jobs report was pretty much exactly what you’d expect — but there were a lot of buyers at those higher yields, and a couple of minutes after the report was released, yields were right back to where they were ex ante. Indeed, the amount that the 10-year Treasury yield moved on Wednesday is going to turn out to be much greater than the amount it’s going to move today.

My reading of these particular tea leaves, then, is that the market is comfortable at its current levels, and that it has also made peace with the inevitability of the taper in 2014. My guess is that the taper will start on March 19, at the first open market committee meeting chaired by Janet Yellen, and that 10-year yields will be then more or less where they are currently, in the 3% range. Right now, given the almost insatiable demand for high-quality collateral, I’m reasonably sanguine about all this, and I suspect that the market will be able to step in to buy Treasuries at these levels even as the Fed steps out. Maybe this is just the short term effects of the good mood that the BLS put me in this morning. But I’m determined to try to keep smiling at least through the rest of the holidays.

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