MORGAN STANLEY: The Fed's Decision To Taper In September Is Now Dependent On A Single Data Release

A weaker-than-expected July jobs report in the U.S. on Friday did a little to temper consensus expectations that the Federal Reserve will begin to taper back the pace of monthly bond purchases it makes as soon as the September FOMC meeting.

Strength in prior job reports this year has been the cause for big sell-offs in the bond market as traders price in increased chances of tapering, but Friday, the market had the opposite reaction, piling into bonds and sending yields lower.

Now, Morgan Stanley chief U.S. economist and former FOMC secretary Vincent Reinhart says the Fed's decision over whether or not to begin tapering in September comes down to one more datapoint: the August jobs report, due out in a month.

"The net consequence of the neither hot-nor-cold report is that the Fed really will be data dependent in its decision on tapering at its September meeting," writes Reinhart in a note. "If the August jobs report is weaker than the print on Friday, then it would be difficult to justify dialing back policy accommodation. A report around these July payroll gains or stronger, the Fed can assert that there has been enough sustained improvement to justify scaling back the pace of its purchases."

Reinhart believes the August report will be better than the July report, which means according to his assertion, the FOMC will be set to announce a tapering of quantitative easing at the September meeting.