Fed tapering is coming, it’s just a question of when. Last week I would have put the chances of a December tapering announcement from the FOMC at 20% with an 80% probability of March. Following the better-than-expected October payrolls data the odds are still in favour of March but are now 60:40. The odds would have been even were it not for the fact the detail behind last-weeks better-than-expected Q3 GDP data was soft.
October payrolls came in at +204k, well
ahead of expectations of +120k.
Furthermore there was a hefty upward revision to August and September of
+70k. Three-month average payrolls
growth is now back up to 202k. Readings
on the average hourly work week and hourly earnings were a tad softer than
expected although they may have been impacted by the government shutdown. In general though there was little sign of impact
from the shutdown on hiring activity.
One area it did have an impact was in the
household survey which derives the unemployment rate. Despite the better than expected payrolls
employment, the unemployment rate nudged up from 7.2% in September to 7.3% in
October. That in part reflects a
significant drop in the participation rate over the month which possibly
reflects furloughed workers reporting they were not seeking work and therefore
not being counted in the labour force.
That should reverse out next month.
In terms of the Fed, we know their decision
to taper will be dependent on the data flow.
While the payrolls data was good in that regard, the optimism will be
tempered by the detail of last week’s Q3 GDP.
While headline GDP topped forecasts by a significant margin that was most
mostly due to a build-up in inventories while final demand was quite soft. Furthermore, the increase in inventories will
likely unwind over the next few months.
That has us continuing to expect a March 2014 start to tapering but December
is very much in the frame.
In China October activity data was consistent
with a stabilisation of growth in activity at around 7.5%. Export growth was stronger than expected and
industrial production nudged higher again.
Retail sales growth continued to travel sideways at around 13% while
growth in fixed asset investment continued to slow in year-on-year terms. That’s all consistent with our view that
growth in exports would recover along with global growth, that investment
growth would slow and that retail sales would do something in between! At this point I’m still happy with my 7.6%
forecast for 2013 annual average GDP growth.
Further out the growth outlook will be determined
by the outcome of the current 3rd Plenary Session of the Party
Congress. We may start to see details
emerge over the next few days about the likely reform program that will be a
key determinant of medium-term growth. As I've said many times structural reform and rebalancing of the economy are important elements of ensuring strong non-inflationary growth in the period ahead.