A weak jobs report and rising yields: Too soon for an aggressive taperAdvantageVoice® Blog—
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist
Many market watchers anticipate that the Federal Open Market Committee will begin to reduce its $85 billion a month in bond purchases at its September 17–18 meeting. While such a tapering might be possible, two indicators are probably giving the Federal Reserve (Fed) food for thought: rising Treasury yields and not-rising-fast-enough employment.
As the Labor Department reported this morning, the unemployment rate stood at 7.3% in August, barely lower than the 7.4% level in July. For perspective, the unemployment rate in August 2012 was 8.1%. The long-term unemployed (unemployed 27 weeks or longer) remained elevated at 37.9% of the unemployed. The labor force participation rate—the percentage of the working age population that is looking for work or working—continued to deteriorate to 63.2%. These are important indicators, as the Fed is not just looking at the unemployment rate to determine whether the labor market is displaying substantial improvement. The Fed is also looking for a decline in long-term unemployment and an increase in the labor force participation rate. Because of the signals from this employment situation report—the last one before the September 18 policy announcement from the Fed—it could be tough to justify an aggressive tapering.
Nonfarm payrolls increased 169,000 in August, primarily in the retail trade and health care areas. Private sector payrolls expanded by 152,000, and government payrolls increased by 17,000. The 169,000 pace is below the 184,000 average pace over the past 12 months. There were substantial revisions to July and June data for a combined reduction in payrolls of 74,000.
Over the past week, there were positive data releases on manufacturing and nonmanufacturing activity. That positive activity has not translated into more rapid job creation. Low inflation and a weak labor market equate to an accommodative Fed. This mix also probably translates into continued high profit margins for U.S. businesses and resilient stock prices.
While all eyes will likely be on the employment report today, the Fed may also be looking at, but less concerned about, the 10-year Treasury yield bumping up against 3% yesterday. The last time the 10-year Treasury yielded 3% was the summer of 2011. That was before Standard & Poor’s downgraded the U.S. government’s credit rating. That was before the debt ceiling debacle. That was before we had significant gross domestic product revisions that showed the U.S. economy was in worse shape than originally reported. That was before things in Europe really got messy. It was also right before my son was born.You can choose which of the above—or what combination—is to blame for the low yields. The Fed’s policy called QE2 (the second round of quantitative easing) had just wrapped up in June 2011, and Operation Twist wouldn’t start until after the Federal Open Market Committee’s September 21, 2011, meeting. So, it might be tough to argue that Fed policy was the sole thing pushing Treasury yields lower. It seems like a lot of fear—fear of slow growth, fear of Europe, fear of being a first-time father—made the biggest difference in pushing yields lower. If the Fed eases a little less than before, and if fears are abating, that hardly seems like a bad thing for risky assets like equities or higher-yielding fixed income. Those fears, though, can return, and it’s possible that Treasury yields could come back down below 3%. That is likely to be more like a short-term visitor than a permanent guest.
The views expressed are as of 9-6-13 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.