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NFP: Final Piece in Fed Puzzle?

Posted By Barry Ritholtz On August 4, 2006 @ 6:45 am In Employment,Federal Reserve,Inflation,Markets | Comments Disabled

Nfp_20060803192818 [1]
Everyone’s favorite datapoint is out today: Non-Farm payrolls gets released at 8:30. Of course, I am sticking with the "Under," with consensus around 150,000 new jobs created — barely enough to keep up with population growth.

I have said in the past that any single monthly data point is far less relevant than the overall trend, and that investors should never get too hung up on any outlier — to the upside or the downside.

Today may prove to be the exception to the rule.

Bloomberg reported that St. Louis Fed President William Poole, felt "50-50” [2] about another hike on August 8th. San Francisco Fed President Janet Yellen said in a speech that "federal funds rate currently lies in a vicinity that is roughly appropriate" for the balance between growth and containing inflation.

That makes today’s NFP the last major data point the Fed will get prior to their meeting next week. Between now and 2:15 on Tuesday, we’ll get Same Store Sales, and Productivity and Costs — neither of which are major Fed movers.

That raises the importance of today’s NFP report.

Fed Fund Futures are leaning slightly to a pause, with the odds of another hike at 42%. In the Ahead of the Tape [3] column this morning, Justin Lahart describes it thusly:

"The confusion [over Fed futures] reflects an uncertain
economic outlook. The economy appears to be slowing, but it isn’t clear
how severe the slowdown will be. Inflation appears to be heating up,
but it isn’t clear how much."

Whether the Fed pauses or not, I expect to see a major revision to
their statement, one that implies they will not be hiking in September.

All the teeth gnashing over a 1/4 point hike –  is there THAT much difference between 5.5% or 5.25%? I find it quite telling, as it it reveals how fragile this recovery actually is. A robust economy with strong job growth and healthy organic expansion wouldn’t care a whit about a 5.5% Fed funds rate. Yet the markets have been wailing about the Fed as if they had Bernanke’s boot on their collective throats.

Me thinks they doth protest too much.

The issue Bernanke must wrestle with is of Greenspan’s making: The prior Fed chair cut rates to historic levels, setting off a re-inflation of the economy that morphed to the present inflation. At the same time, this Fed stimulus of increased money supply and ultra low rates has been the prime driver of the expansion. 

What has complicated matters for the new Fed Chair is the old Fed Chair’s "measured removal of accommodation." Imagine telling a child that you were going to take a piece of candy away from them every hour on the hour? They sure as hell would start whining each time the big hand approached the 12. 

Similarly, equity market participants have been crying with each and every approaching rate hike, and have been celebrating any evidence that they may get to keep their candy.

Today’s data is likely to cause more of the same — a light number — anything below the consensus — gives the Fed their final excuse to pause. Lahart also noted the importance of NFP wage component:  "A big increase in average hourly earnings, in other words, might tip the Fed further into inflation-fighting mode, prompting it to raise rates again."

I’m betting the number is soft. I put on partial long positions yesterday, and will scale into more in the event of an ugly number that causes a nasty gap down. 

Forget Fisher’s 8th inning analogy, now in its 14th month. At this point, my only question about the Fed is whether  its the top or the bottom of the 9th.

Wage Cost Worries [3]
Justin Lahart
WSJ, August 4, 2006; Page C1

Fed’s Poole, Yellen Signal Interest-Rate Pause May Be Justified [2]
Scott Lanman, Craig Torres
Bloomberg, July 31 2006

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/08/nfp-final-piece-in-fed-puzzle/

URLs in this post:

[1] Image: http://bigpicture.typepad.com/photos/uncategorized/nfp_20060803192818.gif

[2] St. Louis Fed President William Poole, felt "50-50”: http://www.bloomberg.com/apps/news?pid=20601087&sid=ay80fayd_rmU&refer=home

[3] the Ahead of the Tape: http://online.wsj.com/article/SB115465220595426458.html

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