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Payrolls Affirm December Rate Hike

Had the Federal Reserve ordered an employment report it could hardly have done better than the October variant released on Friday.

Non-farm payrolls jumped 271, 000, reported the Labor Department, far more than the median estimate of 185,000 and higher than any single forecast in the Bloomberg survey of economists. The unemployment rate dropped to 5.0 percent the lowest it has been in seven years.

Even wages, a perennial source of disappointment, gained 0.4 percent on the month, and more importantly, the annual increase in the average hourly earnings reached 2.5 percent, the highest it has been since July 2009. That is a sharp improvement from the 2.0 percent average in the six years since the recession and a 25 percent jump from the same rate in June.   

After two months of declining payrolls that led many analysts to doubt the Fed would raise rates this year despite their clear desire to do so, the October rebound seems to have justified Federal Reserve confidence that the economy will be strong enough to withstand a rate hike in December. 

The odds of a December rate increase rose to 70 percent on Friday from 58 percent on Thursday, according to Fed Funds futures tracked by the CME Group in Chicago. 

Markets responded to the payroll report with a surge in the dollar and Treasury yields. The euro fell more than a figures and a half to close at 1.0740, its lowest versus the dollar since April. The yield on the generic 2-year Treasury at ended at 0.8859 the highest close in over five years.

Commodities fell with the rising dollar. The Bloomberg commodities index ended at 85.2346, its lowest close since August and the second weakest finish in seventeen years.  Crude oil sank, West Texas Intermediate lost 2 percent to $44.29.

The Dow gyrated for most of the trading session, losing and gaining more than 100 points several times, but it finished the day adding 46.9 points to 17,910. 

At the October FOMC meeting the governors had cited weakness in the global economy as a threat to U.S. growth.  China, Brazil, Japan and the Eurozone have seen weakening growth which has affected the U.S. economy, which, along with the more expensive dollar have hit exports and company earnings.

Despite the strong results in job creation and wages, labor markets are not fully recovered from the losses of the recession. The labor force participation rate, the share of Americans working remained at 62.4% in October, the lowest reading since 1977, before women had begun to join the labor force enlarge numbers. 

In October, 7.9 million workers who wanted employment could not find it, more than six years after the recession ended.

A broader measure of unemployment, the so-called underemployment or u-6 rate that includes  workers in part-time time jobs who want full time employment or have looked for a position within the past year, fell to 9.8%, the lowest level since May 2008, largely due to a sharp drop in the number of part-time workers. 

The measure of 'household jobs', the survey that produces the unemployment rates, rose by 320,000, following September’s loss of 236,000. 

Job growth in October was almost exclusively in the private sector, which added 268,000 positions. Government payrolls grew by only 3,000.

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

 



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