A Potential Speedup in Fed Tapering Now Takes Top Billing (Along With the Virus)

Besides fear of the virus, the stock market will have to contend in the next week and a half with the need for Congress to hike the debt ceiling and the likelihood of a Fed decision to speed up the pace of tapering.  The former will probably be a nail-biter as the December 15 deadline approaches, but should be resolved in time.  The latter, also due on December 15, could have significant implications for the timing of Fed rate hikes, but this issue is more for next year than now.

Friday's November Employment Report should not derail a speedup in Fed tapering, although it could argue for a smaller-than-otherwise degree of faster tapering.  While November Payrolls were weaker than expected (which was the risk), a rebound in the Nonfarm Workweek helped boost Total Hours Worked.  The latter suggests strong Real GDP Growth in Q421, as the October-November average is  up 4.7% (q/q, saar) from Q321.  Moreover, the drop in the Unemployment Rate to 4.2% indicates above-trend economic growth.  And, the Rate's level and the politically sensitive Black and Hispanic Rates are less than 1% pt from their prepandemic lows.  So, there is ample reason for the Fed to speed up tapering.  But, there is also reason to temper the speedup, found in the deceleration in Average Hourly Earnings.  The 0.3% m/m increase in AHE is below the recent 0.4% trend and suggests that wage inflation is contained.  

The Fed began tapering by cutting the $120 Bn/month purchases of long-term Treasuries and Mortgage-Backed Securities by $15 Bn last month.  With $105 Bn left, an increase in tapering to $20 Bn would end these long-term purchases in 5 months (April-May).  An increase to $25 Bn would end it in 4 months (March-April), while $30 Bn would end it in 3.5 months (February-March).  An ending of these purchases will not automatically mean the Fed will begin hiking rates, but it will open the door for it, based on officials' comments.

Even with wage inflation apparently in check, this week's print for the November CPI risks being high.  Consensus looks for +0.7% m/m Total and +0.5% Core.  The risks of higher or lower prints appear balanced.  Used Car Prices are likely to play a noticeable role in boosting the CPI again.  These will eventually reverse, but now signal the production constraints that limit the supply of new vehicles.  When Fed Chair Powell says that "temporary" is no longer a useful characterization of the observed higher inflation, he essentially means the Fed must lower its estimate of non-inflationary growth to account for these on-going constraints.  So, the Fed has boosted the significance of the outsized moves in Used Car Prices.