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Daily Wrap Up 3 November 2021

3 Nov 2021 04:20 PM

Markets muted ahead of Fed

Stocks are a touch lower as traders await the Federal Reserve meeting. There is growing speculation the US central bank will announce the tapering of its bond buying scheme, which currently stands at $120 billion per month. The minutes from the most recent fed meeting indicated that tapering could begin as early as November, so if that is the case, the announcement could be made later. Inflation in the US is at a 13 year high, of 5.4%. The unemployment rate has fallen to 4.8%, the lowest mark since the pandemic kicked in, so it is clear the labour market is improving. With these stats in mind, there is an argument the Fed should pull the trigger and start tapering the asset purchase scheme.

Between September and October, stocks came under pressure, partially due to higher inflation and fears about tapering but seeing as the S&P 500 and the Dow Jones set new record highs last night, it is fair to say that concerns have faded. In 2013, we witnessed the “taper tantrum” as the Fed started to unwind its stimulus package, but it seems unlikely there would be any major disruption to stocks seeing has it has been doing the rounds for several months.

It is possible the Fed might decide not to begin tapering today, and instead play the wait and see card. It is worth noting the previous two US non-farm payrolls report were very disappointing. The September update was announced in early October, and it showed that only 194,000 jobs were added, and that was nowhere near the 490,000 forecast. The reading was so low, it even undershot the lowest estimate of economists surveyed. Last week, it was confirmed the core PCE report – the Fed’s preferred inflation measure – held steady at 3.6%, which suggests that demand is standing still. There is a case to be made the Fed should maintain their policy and wait and see how Friday’s non-farm payrolls report comes in before making any decision with respect to tapering.

The economic data from the US today was broadly well received as the ADP employment report came in at 571,00, its highest reading in four months. The ISM non-manufacturing report surged to 66.7. The finer details of the update showed an alarming divergence between prices and employment. The prices paid component, rose to 82.9 from 77.5, while the employment metric slipped from 53 to 51.6. The spiralling prices combined with the sluggish growth in job poses a double threat to the economic rebound. The US dollar index is basically flat ahead of the interest rate decision.

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