Daily Insight – Fed waiting for more evidence

by: Aline Schuiling , Peter de Bruin

  • Fed says it is still waiting to be fully convinced by economy before tapering…
  • …we think that this will not be until March given fog created by fiscal mess…
  • …indeed the ADP report signalled that the labour market was hit by shutdown in October
  • In the eurozone, bank lending standards still tightening, but to lesser degree

 Fed: tapering postponed not cancelled

The Fed statement was somewhat more hawkish than expected by markets, hence the negative impact on equities, Treasuries and gold and support for the dollar. Granted, FOMC members became a bit more negative on the assessment of the economy, stating that information ‘generally’ had suggested that economic activity had continued to expand at a ‘moderate pace’, while the recovery in the housing market had ‘slowed somewhat’. But this was offset by the Fed no longer being concerned by tightening financial conditions, as it was during the September meeting. This suggests that the FOMC currently feels comfortable about the level of longer-term yields. Indeed, the statement continued to suggest that a tapering remains on the cards, though, as in September, the Committee wanted to see more evidence that progress will be ´sustained´ before adjusting the pace of its purchases. All in all, while the statement does not rule out a December tapering, we doubt that the data will have turned convincingly enough by then to prompt FOMC members to start scaling back their asset purchase programmes, especially with the fiscal mess muddying the waters (see below). As such, we continue to look for the Fed to start its tapering in March of next year.

 US labour market hit by shutdown

The US private sector added just 130K jobs in October, which marks the slowest pace of job growth since April of this year. What is more, September’s figures were revised downwards from 166K to 145K, suggesting that a labour market that was already losing some pace, slowed further on the back of the government shutdown and the hostile debt ceiling debate. Although on a month on month basis, ADP’s ability to forecast the official labour market figures has sometimes been less than impressive, this suggests that October’s nonfarm payrolls report that will be released on the 8th of November, will probably see about 150K jobs being added in the private sector. Meanwhile, the damage to employment at the federal government should be relatively limited, as furloughed government employees continue to be perceived as employed in the Establishment Survey, though the experience of the government shutdowns in 1995Q4/1996Q1 does suggest that there was a bit of an uptick in the firing of federal government employees. Bringing everything together, we think that October’s nonfarm payrolls will show a 130K gain.

 Eurozone bank lending standards tighten less

In the eurozone, the ECB’s October Bank Lending Survey (BLS) revealed that the net percentage of banks reporting a tightening of credit standards on loans to non-financial enterprises fell to 5% in Q3 from 7% in Q2. Meanwhile, the net tightening of credit standards on mortgage loans to households declined to 3% from 7%, while standards for consumer credit were tightened a touch after they were eased in Q2 (balance to 1% from -2%). Zooming in on loans to enterprises, own cost of funds and balance sheet constrains contributed to a slight easing of credit standards but worries about the economic outlook and industry or firm-specific outlook still led to the overall net tightening of standards. Looking ahead to Q4, banks reported that they expect a net easing of credit standards on loans to enterprises (balance -5%). Turning to demand for loans by enterprises, banks still reported a significant decline in demand, but to a lesser degree than in Q2 (balance to -12% from -18%). This decline in demand was still driven by low investment intentions. Looking forward, banks expect loan demand by enterprises to increase in Q4 (expected balance: 2%). All in all, the BLS suggests that the drop in bank lending to enterprises reflects a significant cyclical element and it should therefore ease in the coming months, as economic conditions improve. However, credit availability is likely to be still restrained to some extent by bank deleveraging. The ECB’s assessment exercise should shine more light on the status of this process, though it will not be complete for another year.