- Minutes from the Fed's September meeting will shed light on the decision to signal taper.
- Doubts about tightening after weak job figures may subside.
- The dollar has room to rise and stocks to fall.
Conditions for taper are "all but met" – these words by Federal Reserve Chair Jerome Powell have been reverberating in traders' minds. Perhaps the weak Nonfarm Payrolls figures could give the bank cold feet about reducing its $120 billion/month bond-buying scheme. Will "all but met" turn into "not there yet"? The FOMC Meeting Minutes could shatter that notion.
The US economy gained only 194,000 jobs in September, less than half the roughly 500,000 expected. It was the second consecutive disappointment and may indicate a substantial slowdown in hiring – perhaps casting doubt on the need to tighten. One of the Fed's mandates is full employment.
Another reason to think twice comes from wage data in the Nonfarm Payrolls report. Average Hourly Earnings rose by 4.6% YoY, as expected. It would have been lower if more leisure and hospitality workers had joined returned to the workforce, as their pay is relatively lower. With fewer such jobs added, pay rises were higher.
The salaries figures are pointing to lower inflation as consumers have less money in their pockets. It is essential to note that this preview is written before Consumer Price Index statistics for September. are released. However, August's Core CPI missed estimates and slid to 4%.
A softer labor market and weaker price pressures mean more support is needed from the Fed. The bank could delay its official taper announcement from November to December, resulting in more dollar printing – and thus a weaker currency. Is this the case? Not so fast.
The fact that fewer leisure and hospitality workers returned to work is the result of COVID-19. The Delta variant continued wreaking havoc in the US and caused patrons to shy away from restaurants – thus resulting in less hiring. Recent coronavirus statistics are pointing to a drop in cases, implying these jobs could come back later on.
Moreover, circling back to Powell's words – "all but met" – means the bar for refraining from tapering is extremely high Moreover, the Fed vowed to give markets a warning "well in advance" and prevent a 2013-style "taper tantrum." So far, the S&P 500'' 5% fall from the all-time highs is not even a formal correction, which is 10%. So far, so good for the Fed's plan of an early warning.
Therefore, the bar is high for changing the Fed's mind. The NFP was not great, but good enough to taper – especially as upward revisions added some 131,000 jobs to August's NFP.
Overall, the Federal Open Markets Committee (FOMC) minutes should reiterate the bank's position that taper is coming.
Will markets disregard the document as old news? While the September meeting was held well before the NFP, it is essential to note that the minutes are revised until the last moment. Officials are aware that their words move markets – and investors know that. Therefore, it is not stale documentation of the bank's meeting, but rather another tool to convey a message.
If, as this analysis implies, the Fed reminds markets that it is keen to taper bond buys, there is room for the dollar to rise and for stocks to fall. Such a reaction would be even more pronounced if CPI inflation data comes out on the softer side. An earlier slowdown of the printing press means a stronger currency and less creation of money means fewer dollars that would go to the stock market.
In case the FOMC minutes are full of conditions and seem unsure about tapering – unlikely given the vociferous hawks in the Fed –the greenback would retreat and equities would benefit.
The FOMC Meeting Minutes from the bank's September decision will likely serve as a reminder that the Fed is about to taper in November – boosting the dollar.
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