With Friday's upbeat U.S. jobs report exceeding expectations, market players are now saying that the Federal Reserve could begin tapering its quantitative easing program as early as this September.
The economy added 195,000 jobs in June, according to the Labor Department report released Friday, and the unemployment rate was unchanged at 7.6%. Although the number of long-term unemployed was essentially unchanged at 4.3 million, the report stated that June's increase is in line with the average monthly gain of 182,000 over the last year.
Wall Street had expected the economy to add only 165,000 jobs last month, so the much larger number of jobs created in June along with an upward revision for April and May has encouraged the belief that the Fed will start to put the brakes on its bond-buying program before the end of the year.
"The one weaker-than-expected part was the unemployment rate being flat at 7.6%—consensus was down a tenth—but overall the report has a strong tone," wrote Jim O'Sullivan, chief U.S. economist with High Frequency Economics in Valhalla, N.Y. "Employment growth continues to look more than strong enough to keep unemployment trending down—even though the rate was only flat in June—and probably more than strong enough to lead to Fed tapering starting in September."
O'Sullivan noted that there will be two more employment reports before the September Federal Open Market Committee (FOMC) meeting.
Rick Rieder, portfolio manager of BlackRock's Strategic Income Opportunities Fund (Class A: BASIX) and co-head of BlackRock's Americas fixed-income unit, said the 195,000 boost in payroll jobs for June promotes the concept of "a solid, but not spectacular, U.S. growth story" that is now seeing labor market improvements follow alongside broader economic gains.
Along with improved data on income levels and better consumption numbers, Friday's report gives the Fed the confirmation to move forward with its reduction in large-scale asset purchases, "and we think that this will begin in September and that markets are clearly pricing this possibility in today," Rieder wrote in a comment. "We think that the Fed will be very deliberate in moving interest rates, but will be more aggressive in reducing a QE program that had grown too large in scale relative to the benefits it afforded the economy."
On how he is positioning BASIX, which is BlackRock's flagship fixed income fund, Rieder said he continues to like keeping interest rate sensitivity very low, and continues to believe the dollar will strengthen, especially given recent moves by the European Central Bank and Bank of England as well as the "clearly easy policy" in Japan.
