Currency Briefing: US December jobs report unlikely to derail tapering

on Jan 14, 2014
Updated: Oct 21, 2019

Atlanta Federal Reserve Bank president Dennis Lockhart said yesterday that he supports “similar tapering steps” to that taken last month by the Federal Open Market Committee, to reduce asset purchases by $10 million, as long as the economy advances at the 2.5 to 3 percent pace he is anticipating for this year.

The question has loomed large in the markets whether the Fed will continue to trim asset buying after the government on Friday reported unexpectedly tepid December job gains. Many analysts see the Fed continuing its gradual and steady pace of cuts in asset buying, but if the coming months’ data are also weak and disappointing, the resilience of the US recovery will itself come into question.

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While Lockhart remained concerned about the labor market and inflation, he said he is more positive about the current year’s expected path of growth. “We are entering this year on a more solid economic footing”, he asserted, citing reduced government uncertainty, a rebounding housing market and improved prospects in the corporate sector.
At the December FOMC meeting, the Fed decided it was time to trim the stimulus measures because of the brightening picture of the US economy. Treasury and mortgage-backed security purchases were trimmed to $75 billion per month from $85 billion previously, effective from this month’s buying round. At the meeting on 29-30 of this month, with Ben Bernanke presiding for the last time, the policy-makers are bound to debate whether to keep scaling back their bond-buying programme at that or some other pace or whether to shut down tapering for now. It seems unlikely they would set that reverse course on just one labour market report.

Meanwhile, markets are still digesting Friday’s lacklustre jobs data and the USD has been able to strengthen only to 1.3638 against the euro as participants wait to scrutinize the next releases, namely December Retail sales, CPI and PPI, during the balance of the week. The payroll data are typically characterized as “noisy” and are subject to big revisions, causing some market observers to disregard the NFP until confirmed in the following month.

In any case, most analysts would agree that the greatest economic risk, that of deflation, lies beyond the United States.

[!fm[](/uploads/story/8048/pic11.png)](# “”)Why is deflation so dangerous? Historically it has been inflation which has been regarded as far more threatening. The essential problem with deflation is that it makes any given quantity of debt much more expensive for the debtor to pay off. This singular factor explains the determination of the US Federal

Reserve and other central banks to prop up inflation, at least within reasonable bounds (ie, around two percent). In the wake of the credit crisis, deflation is the last thing anyone needs.
The Federal Reserve’s “forward guidance” as introduced by Bernanke aims to provide certainty and reduce volatility, providing businesses and investors with the ability to plan. In essence, forward guidance is the central bank’s commitment to defined future actions on interest rates, liquidity provisions or quantitative easing over a medium to long-term horizon.
Analysts are now broadly in agreement that the Fed is satisfied that the US economy gained ‘exit velocity’ momentum in the fourth quarter of last year. The only worry remains deflation (currently lurking in the wings in the form of disinflation), and it’s a big enough concern to forestall any talk of interest rates hikes.

But the tapering of another $10 billion this month is for many observers almost a given, the December NFP notwithstanding. This is most probably the main reason why the EUR/USD couldn’t overcome the 1.3700 hurdle on Friday and has been unable to since.
On the other hand, any slide below 1.3600 before upwardly mobile retail sales data tomorrow would surely be premature.


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