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All of a sudden, people seem to be talking about tapering a lot more than before. It’s been clear for months that the Fed wouldn’t be buying $120B/month in January, but the July jobs report now makes that a certainty. We’ve been penciling in a Dec start for a while and still hold that view (w/a greater risk of Nov than Jan). It’s very hard for tapering to begin before Nov for the following reasons: 1) Powell at Jackson Hole won’t definitively say “we are tapering on XYZ date by XYZ amount” because that is a decision for the full FOMC, and he won’t want to get ahead of his colleagues (he will strongly hint though at tapering occurring in CQ4); and 2) Powell has been clear the Fed will provide ample warning to markets before tapering begins, so if a definitive tapering proclamation won’t arrive until Sept, it’s hard to see Oct being the first month of dialed back purchases.

The U.S. government spent at least $5.2 trillion to combat the covid-19 crisis. It stands as one of the most expensive, ambitious experiments in U.S. history. And it succeeded.

Perhaps the market is detecting a change in the Fed’s reaction function in that officials haven’t expressed the level of disappointment with the most recent jobs report that some had come to expect. There is just about complete unanimity for tapering to start in Nov or Dec and it would take a horrendous jobs report on 10/8 (probably 150K or worse) to forestall a reduction in QE from occurring this year.

While the tightening process is happening at a very glacial pace, monetary policy globally is at a hawkish inflection point. New Zealand’s central bank is on track to hike rates on 10/5 (Tues night/Wed morning), becoming the second developed market to increase after Norway, while the approaching US jobs report (on Fri 10/8) is very unlikely to be weak enough to forestall Fed tapering (the St is modeling +515K while it would probably take ~150K or worse for the Fed to not proceed w/tapering at its 11/3 meeting (and the FOMC minutes on 10/13 will likely have a hawkish bias to them). Meanwhile, the ECB on 10/28 will outline its tapering agenda and the BOE on 11/4 (one day after the Fed) will likely set the stage for rate hike on either 12/16 or 2/3. Given these catalysts over the coming weeks, it’s hard to be bullish on Treasuries and we suspect yields will additional upside risk (which means tech has further downside risk).

The Labor Department said Friday that the economy added 476,000 jobs in January. Economists surveyed by Dow Jones expected an addition of just 150,000 jobs, with some Wall Street pros projecting net jobs losses for the month due to the omicron variant surge.

You have to raise rates, but you don’t want to tip the economy into recession. If you tip the economy into recession you get stagflation, that’s really bad . . . My current bidding is the Fed will raise very methodically now. The worst thing that can happen is that the war recedes, the world reverts to somewhat normal, now inflation is raging, and the Fed didn’t do enough. It’s a tough hand.