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Employment data has been coming in better than analysts expected, with non-farm payrolls rising by 163K in July and the number of initial jobless claims beating dour analyst estimates.These positives indicate that the economy is probably doing better than everyone thought last month, when data indicated that the US economy had slowed significantly from the first quarter.
Deutsche Bank’s Joe LaVorgna explains:
We care about these revisions because they could impact expectations for growth in the current quarter and beyond. At present, we continue to believe that second half growth will exceed the first half, similar to what the economy experienced last year. If our forecast proves correct, then we must see a stronger pace of job growth. The recent claims data are encouraging in this regard.
Investors generally assume that a better economy also translates into a lower likelihood of quantitative easing come September 12-13, at the next meeting of the Federal Reserve’s Open Market committee. We’ve seen this belief reflected in rallies after particularly bad data and sell-offs after surprisingly good data.
But LaVorgna also thinks that this might not be the case. The reason? In a word, Europe:
A key question is whether this will stay the Fed’s hand at the September 12-13 FOMC meeting. Arguably, developments in Europe will have as much weight on the FOMC deliberations as the next employment report and all of the various economic indicators we get over the next five weeks. In our view, if European financial markets improve over the next month and US economic data gain some traction, the Fed may not feel compelled to undertake further easing initiatives. Remember, too, that the Fed’s annual Jackson Hole conference is at the end of the month. In the past, the Chairman has used this gathering to hint of potential policy action.
Is the Fed scared enough about the European crisis to go ahead with easing plans despite positive data? Obviously the financial stresses across the pond are significant and markets move on the latest headlines. That said, even the best tools in the Fed’s toolbox might not be enough to restore confidence in financial firms tied to the survival of the euro.
And if U.S. economic data aren’t the problem, then the Fed’s focus on Europe—and consequently, the prospect of deflation—will serve as an assessment of EU leaders’ abilities and willingness to address Europe’s problems. If the Fed believes EU leaders and the ECB will deliver on a possible bazooka to stabilise Spain and Italy (at least for now) then they may be less likely to take action…at least next month.