Last week all three U.S. stock indexes saw declines over 1 percent during a shortened holiday week that culminated in some profit taking, end of the month portfolio adjustments by portfolio managers, and a late market selloff on Friday following mixed economic reports and nervousness ahead of this Friday’s job report for May that may provide an impetus for the Fed to gradually taper its $85 billion bond buying program as long as the payroll number and labor force participation rate don’t drastically underperform.
Economists estimate that the U.S. economy added 165,000 payroll jobs during the month of May while the unemployment rate is expected to remain at 7.5 percent.
In April the unemployment rate was at 7.5 percent and has declined over a half percentage point since last summer.
Steady gains in non-farm payroll job reports over the past six months has shown averaged job gains over 200,00 per month compared with averaged monthly gains of 140,000 in the previous six months.
Despite improvement in the labor market, the labor force participation rate continues to move down which remains a concerning data point for the Federal Reserve as it probes for softness in the U.S. economy to justify its monthly quantitative easing program of $85 billion in bond purchases during its third round of quantitative easing (QE3).
Last Thursday the Commerce Department confirmed that U.S. Gross Domestic Product (GDP) was revised to 2.4 percent, adjusted for inflation, in the first quarter of 2013 after increasing 1.75 percent in 2012.
As the U.S. economy shows some gradual signs of improvement in the labor market, along with a clear upswing in the housing market and a buoyant stock market that is not far from record highs, many investors question whether there is a need for extended quantitative easing in 2013 to stimulate the U.S. economy and keep interest rates at historically low levels while the Fed Reserve extends its balance sheet to over 3 trillion.
Thomas Michaud, chief executive officer of Keefe, Byuyett & Woods, spoke on Bloomberg’s Surveillance in late May and weighed in about quantitative easing with its impact on the banking industry.
“QE has been very helpful to the economy but the reality is that near zero interests have really been hurting banks at this stage in the game. The industry is not designed to make money at near zero interest rate” Michaud said.
Since January 2013 the S&P 500 has been up over 14% in a market bolstered by aggressive quantitative easing from the Federal Reserve, decent corporate earnings, and gradually improving economic data across the United States.
During a question and answer session on Capitol Hill on May 22nd, Fed Reserve Chairman Bernanke admitted that the rate of bond purchases could slow in the next few meetings which suggested to many investors that the Fed Reserve may be planning to taper its support of aggressive monetary stimulus.
San Francisco Fed Reserve Bank Chairman John Williams said in a speech in May from Portland, “We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer.”
Minutes from the Federal Reserve’s May policy meeting revealed that a number of Fed officials might want to reduce the pace of the central bank’s bond-buying program as early as their next meeting on June 18-19th if the U.S. economy appears to be on a steady path of recovery.
Although there have been some clear indications from important Fed members that the Fed Reserve may be tapering its level of quantitative easing, some other Fed members suggest that more market data is needed before the Fed decides to taper its aggressive bond buying program.
New York President William C. Dudley, an influential Fed member who is viewed as close to Chairman Bernanke, said that policy makers will know more in the next few months about whether the U.S. economy is strong enough to keep recovering during the midst of a tighter fiscal environment that is currently undergoing federal sequester cuts.
“I think three or four months from now you will have a much better sense of is the economy healthy enough to overcome the fiscal drag or not” Dudley said in late May on Bloomberg Surveillance.
St. Louis Fed Reserve President and CEO James Bullard echoed that sentiment during a speech in late May from Frankfurt, Germany.
“I can’t envision a good case to be made for tapering unless the inflation situation turns around and we are more confident than we are today that inflation is going to move back toward target” Bullard said.
In April U.S. inflation rose to just 0.9 percent, the smallest increase since early 2012 and safely below the Fed’s inflation target of 2 percent.
On Wednesday the Fed Reserve will provide it Beige book report that is published eight times a year, providing some anecdotal information on current economic conditions in each district.
Economic schedule for the first week of June:
Monday: ISM manufacturing index, 10:00 a.m. EST; construction spending, 10:00 a.m. EST
Tuesday: Motor Vehicle sales will be released throughout the day
Wednesday: ADP employment report, 8:15 a.m. EST; factory orders and ISM non-manufacturing index at 10:00 a.m. EST; Fed beige book, 2:00 p.m. EST
Thursday: Jobless claims, 8:30 a.m. EST; quarterly services survey, 10:00 a.m. EST; ECB meeting- consensus is for no policy change
Friday: Jobs Report for May; Consumer Credit at 3:00 pm EST