You Can Forget About A September Taper Unveil

August’s jobs report will be a test of market participants’ commitment to a bull case predicated (in part anyway) on the notion that the Delta variant and a cooling US economy will compel the Fed to remain cautious as policymakers look to trim the pace of monthly asset purchases.

I wrote that sentence on Thursday evening — so, prior to Friday’s jobs stunner. Like everyone else, I expected a reasonably robust headline NFP print, Wednesday’s lackluster ADP report notwithstanding. Given that, I reckoned the immediate question for risk assets would be whether the Fed could stay patient in the face of still more evidence that full employment (whatever that means these days) will be here sooner rather than later.

Ironically, my assessment turned out to be equally applicable to an extremely poor read on the US labor market.

If the Fed’s doves (and the leadership) were looking for a jobs-based excuse not to rush things when it comes to the taper unveil, they certainly have it in August’s wild NFP miss. But if you’re bullish on equities (or risk assets more generally) due to an assumption about a “dovish taper,” you now need to weigh that against a deceleration in hiring too sharp to ignore.

One thing is clear enough: A September taper unveil is now off the table. Jerome Powell’s Jackson Hole address arguably ruled out September anyway, but now it’s probably a total non-starter.

Given Powell’s emphasis on the labor market and his contention that there’s still “much ground” to cover to reach maximum employment (figure below), the communications challenge around a taper unveil later this month is insurmountable, especially for someone who isn’t an adept communicator.

It’ll be far easier for Powell to simply let the new SEP and dots do the hawkish “talking” while sticking to a script that keeps November as the likely time for an official taper announcement.

But even there, consider that, as Bloomberg’s Ven Ram pointed out Friday, “the Fed will have only one additional jobs report to go by, since the print for October isn’t due before the Fed meeting day in November.”

Does that mean it’s possible that a taper unveil might now be pushed out to December (or into 2022)? In a word, yes. It depends (obviously) on September’s jobs report, and as Bloomberg’s Ram went on to note, “it pays to keep in mind that April was a similarly low number, but the jobs market bounced back with three robust months after that.”

Remember that prior to the pandemic, Powell’s (somewhat dubious) claim to fame was persisting in double-barreled tightening until stocks crashed (in December of 2018). He surely hasn’t forgotten how unpleasant that experience was, so just about the last thing he’d be inclined to do later this month is catch the market offsides with an announcement that the taper starts in October, especially if there’s another hawkish shift in the dots (something over which he ostensibly has no control).

Note that African American unemployment jumped markedly in August’s report (figure below), while the rate for white workers fell.

That resulted in a large widening in the gap (nearly a full percentage point), setting the Fed back on its quest to foster an inclusive labor market. That too argues against a September taper unveil.

The idea that the Fed will somehow overweight the upside surprise in average hourly earnings from August’s jobs report while deciding to move ahead with a taper announcement that virtually no one expected at the September meeting seems silly (for lack of a more sophisticated adjective).

“If nothing else, the August BLS data takes the risk of a September taper off the table, leaving the debate now on November versus December,” BMO’s Ian Lyngen and Ben Jeffery said Friday. “Moreover, the payrolls miss was so significant as to bring into question whether peak employment gains related to the reopening effort have already occurred [which] implies that it will be challenging for the Fed to bring forward the first rate hike of the cycle even in the event that there is a broadening of the categories in which reflation has taken hold,” they added.

This is a good time to quote myself. Last Friday, while discussing one fixed income investor’s contention that market participants should “fully expect [the Fed] to start slowly cutting asset purchases in October,” I wrote that,

I can say with absolute certainty that Powell’s [Jackson Hole] remarks didn’t point in the direction of a September unveil. That doesn’t mean it can’t or won’t happen. But to the extent anyone thought they heard that from Powell, those folks aren’t very adept at Fed tasseography.

Fast forward exactly a week and the idea of the Fed starting the taper next month appears entirely far-fetched.

Coming full circle, the question now is where the pain threshold is for the “bad news is good news” trade. At some point, bad news is just bad news. Put differently: You want a dovish Fed, but not at the cost of an economy that suddenly stalls altogether.