A December 'Taper' Is Getting Closer -- But We're Still Waiting On One Big Number

Housing data released this morning beat expectations and may helpconvince the Federal Reserve to reduce its bond purchases in its December meeting depending on the November jobs report.

Building permits increased 6.2% month over month in October to an annualized rate of 1.03 million, beating the expectations of 930,000. In September, permits rose at a 5.2% rate. This data had been delayed due to the government shutdown.

This indicates that the housing market has continued strong growth despite rising mortgage rates throughout the summer.

When the Fed announced in June that it would taper later in the year if the economy continued growing at a moderate pace, the market assumed that it was guaranteed. Mortgage rates immediately rose and continued to do so through August. The Fed feared that these higher rates would hold back the housing market and hurt the recovery. In response to that and other sub-par data, the Fed surprised the market and delayed tapering in September.

From the September FOMC statement:

The Committee sees the downside risks to the outlook for the economy and the labour market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labour market.

“Tightening of financial conditions” is a bit of a vague statement, but it has been widely assumed to mean that mortgage rates rose. This was part of what was ironic about the Fed not reducing its asset purchases. By pricing in the taper, the market caused rates to rise and actually forced the Fed to postpone the taper.

Since then, the market has been very interested in each piece of economic data. In this case, today’s data shows that financial conditions are looser than the Fed believed in September and could convince the central bank that a December is the appropriate time to taper.

Nevertheless, the most important piece of economic data is still 10 days way: the November jobs report. October’s report was stronger than expected, but it was tough to interpret the results fully due to the government shutdown. The November report won’t be perfect either, but it will still give us the most clear picture of the state of the labour market. If it comes in positively, the odds of a Dectaper will increase significantly.

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