Goldman: "We Now Expect QE To Continue Through Q2 2014 Vs. Our Prior Forecast Of Q3 2014"

Tyler Durden's picture

Until today, Goldman expected the Fed's tapering to start in December. Not any more: following today's better for part-time jobs than expected data, the squid has pulled its tapering prediction up to the September FOMC meeting: just what Zero Hedge said 2 months ago. But what just slapped ES across the face is the following from FRBNY's informal advisor Hatzius: "We now expect purchases to continue through Q2 2014 (vs. our prior forecast of Q3 2014), in line with the guidance given by Chairman Bernanke at the last FOMC press conference." That's ok Goldman, we are used to you being wrong. Speaking of, any more Stolper recos?

From Goldman's Jan Hatzius

Better-than-Expected Employment Report, QE Tapering Likely in September

BOTTOM LINE: The June employment situation report was better-than-expected, with stronger June payrolls growth, upward revisions to prior months, and a larger-than-expected increase in earnings. The unemployment rate remained unchanged, but the employment-to-population ratio and labor force participation rate increased. In light of the better-than-expected labor market data over the past few months, we are bringing forward our call for the Fed tapering QE purchases from the December FOMC meeting to the September meeting. However, we are not changing our forecast for the date of the first fed funds rate increase, which remains in Q1 2016. Fed officials are likely to work hard to dissuade the market from raising its short-term interest rate expectations. This may include changes in the FOMC statement around the conditions for the first hike in the funds rate, including—if needed—a reduction in the 6.5% unemployment threshold.

MAIN POINTS:

1. Payroll employment grew a stronger-than-expected 195k in June (vs consensus +165k). Gains were widespread across industries, with the largest gains in leisure & hospitality (+75k), professional & business services (+53k), and retail trade (+37k). Manufacturing continued to be a small drag on job growth (-6k), while construction added 13k. The Federal government ex-postal service lost only 5k jobs, with the report as a whole showing relatively little discernible impact from the sequester. Net job growth was revised up by 70k over the past two months, bringing average payrolls growth to 196k over the past three months.

2. The unemployment rate remained unchanged at 7.6% (7.557% on an unrounded basis). However, the employment-to-population ratio increased by one tenth to 58.7% and the labor force participation rate rose by one tenth to 63.5%. Employment increased 160k according to the household survey, but rose 350k on a "payroll-consistent" basis, adjusting for definitional differences between the two surveys.

3. Earnings grew an unexpectedly strong 0.4% in June (vs consensus +0.2%), bringing the year-over-year rate of increase to 2.2%. Average weekly hours were unchanged at 34.5. The index of aggregate weekly payrolls?the product of employment, hours per worker, and earnings per hour?rose 0.6%, a decent proxy for wage & salary income growth.

4. In light of the better-than-expected labor market data over the past few months, we are bringing forward our call for the Fed tapering QE purchases from the December FOMC meeting to the September meeting. We expect that purchases may be reduced from the current rate of $85bn per month to $65bn per month, with most or all of the adjustment occurring through reduced Treasury purchases. We now expect purchases to continue through Q2 2014 (vs. our prior forecast of Q3 2014), in line with the guidance given by Chairman Bernanke at the last FOMC press conference. We are not changing our call for the date of the first fed funds rate increase, which remains in Q1 2016, at which point we forecast an unemployment rate of 6.0%. Fed officials are likely to work hard to dissuade the market from raising its short-term interest rate expectations. This may include changes in the FOMC statement around the conditions for the first hike in the funds rate, including—if needed—a reduction in the 6.5% unemployment threshold.