Divyang Shah
IFR Senior Strategist
The no-taper trade has been given a further boost by sub-par payrolls report. The scene is set for underweight investors to now look to use each dip to now get back into equity and bond longs in order to make sure that they do not underperform benchmarks ahead of year-end.
The September payrolls report came in at a soft 148k (exp 180k) which is a shocker, as this was before the shutdown/debt ceiling saga that followed in October. While August was revised higher (193k from 169k) it is the July revisions that stand out – revisions have taken this down to 89k from 162k originally.
The seasonal pattern on payrolls has shown a tendency for the employment picture to brighten up into year-end as well as the early part of the year. This is likely to support a Fed taper in early 2014, most likely at the March FOMC meeting, but the tapering path could hit a speed bump into mid-2014.
The weakness in July payrolls is not unusual when one compares what happened in 2013 with what happened in 2011 and 2012 (see chart http://link.reuters.com/dym27t). The soft patch around mid-year was also a feature in the data in the previous two years.
Thus, while a less troublesome budget battle in Washington in January/February 2014 might allow the Fed to taper the tapering path is unlikely to be smooth.
The current set-up for risk markets is still one where underweight equity and bond investors that had been prepped for a September taper and an October budget battle still looking to get back to neutral/longs. With the dips still proving elusive expect bond and equity markets to remain biased to the upside as most will not want to underperform benchmarks ahead of year-end.
