Jobs data not helpful to risk assets: James Saft

February 7, 2014

Feb 7 (Reuters) – This has got to have been a frustrating
jobs report for Janet Yellen and her colleagues at the Fed.

For stock market and other risky asset investors hoping for
more stimulus it may turn out even worse.

U.S. payrolls rose by 113,000 in January, with only paltry
revisions to the previous month’s disappointing 75,000 total.
The data colored in a picture of a gradually weakening economy
at worst, or at best one which is far from escape velocity.

But unemployment fell to a five-year low of 6.6 percent,
just above the threshold chosen by the Fed as a potential key
milestone on the road to raising interest rates.

Note too that the growth in construction jobs somewhat
undermined arguments that the problems are principally down to
exceptionally cold weather. And while retail jobs took a hit,
that may well be simply part of a huge secular shift away from
physical retail.

No one, of course, believed that the Fed was close to
raising rates before this data, and certainly no-one thinks they
are any closer now. What these numbers do is raise the chances
that the economy is on the slide, without raising by a similar
amount the chances that the Fed will actually do anything about
it by pausing or even reversing the taper.

As that sinks in, it will pose problems for riskier assets,
particularly emerging markets but also U.S. equities.

With no Fed meeting until mid-March, risk investors have to
believe one of two things to be optimistic: that things are
better than they seem; or that the Fed will say something about
its intention to offset weakness. While the first is always
possible, the second seems unlikely.

Since the Fed zigged when the market expected it to zag both
in September, when it didn’t taper, and December, when it did,
Janet Yellen as newly installed Fed chair is just slightly
trapped. To give signs now that she is mulling yet another
reverse is to spend credibility she may not yet have banked.

Beyond that a move towards slowing or suspending the taper,
much less reversing it, would be highly divisive within the
Federal Open Market Committee, where a small rump are skeptical
about quantitative easing’s benefits and very sensitive to its
risks.

CONGRESSIONAL TESTIMONY DRAMA

Yellen is going to have a bit of a job in front of her on
Tuesday, when she makes her first appearance as Fed chair to
make the Semiannual Monetary Policy Report to Congress, formerly
known as Humphrey-Hawkins testimony.

“Yellen will say they are tapering but spend more time
explaining why that does not mean the Fed will be tightening
aggressively,” Steve Englander, foreign exchange strategist at
Citigroup, wrote to clients after the payrolls data release.

“The motivation for tapering is that it is politically
noxious and it is easier for the Fed now to provide stimulus by
forward guidance.”

That’s probably close to what Yellen will say, but both
points are highly debatable.

While an improving federal budget does lessen the impact of
the taper, you only need to look at the amount of money flowing
out of emerging market and high-yield investments to understand
that it has real financial market impacts. Conditions are
genuinely tighter for a large swathe of borrowers today, and are
likely to get tighter yet in several months. That U.S. 30-year
mortgage rates are creeping down towards 4 percent again only
gives the Fed one less reason to be concerned with riskier
investments.

As for forward guidance, well I’d just present the
unemployment rate, which was supposed to play a key role in
forward guidance, as evidence of how difficult it can be to
execute and control loosening and tightening with words and
targets. It must be only a very small group who believe both in
the Fed’s forecasting and in its ability to stick with its
guidance in an uncertain world.

The other larger question is just how bad things would have
to get for the Fed to actually reverse course on the taper.
While the evidence that QE leads to asset price rises is good,
claims that it actually gooses employment or leads to
substantial gains in output are less strong.

All may well end well, the economy may be doing better than
it looks right now, and employment may rise like sap in spring.

If not, however, the Fed will be left just a bit short, hard
by the zero lower bound of interest rates with one politically
expensive and unpopular tool, QE, and one, forward guidance,
which has all the power of a promise.

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