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Strong US NFP strengthens case for December hike; dollar surges to 7-month high

Global currencies plummeted against the US dollar on Friday after nonfarm payrolls rose much more than expected, beating even the highest estimates. Nonfarm payrolls in the United States jumped by 134k in October to 271k – a 10-month high, and was sharply above estimates of 180k. September’s figure was revised down to 137k from 142k, confirming the relative soft patch in August and September.

The unemployment rate slipped to 5.0% – the lowest since April 2008. Expectations were for the unemployment rate to stay unchanged at 5.1%. Even average hourly earnings showed signs of accelerating, having fluctuated around 2% for the past 2½ years. Average hourly earnings rose to 2.5% year-on-year in October from an upwardly revised 2.3% in September. The month-on-month rate edged higher to 0.4%, which was the highest since January and above estimates of 0.2%.

The labor force participation rate was unchanged at 65.40%. However, the underemployment rate, which includes the proportion of people that are in employment but underutilized, fell to the lowest since May 2008. The U6 measure of underemployment declined to 9.8% from 10% in the previous month.

US 10-year treasury yields rose by 7.5 bps soon after the jobs data to 2.32% as markets adjusted their expectations of a December rate hike by the Federal Reserve. The probability of a December lift-off as implied by Fed funds futures jumped to over 70% after today’s payrolls numbers, from around 50% before the data.

The Fed has been signalling all year that a 2015 rate rise is a strong possibility. However, after a series of mixed data and persistently low inflation throughout the year, investors were unconvinced that the Fed would risk the recovery by hiking interest rates before there was more concrete evidence of a inflation picking up.

Many economists had forecast that lift-off would arrive in September but a slowdown in China and volatility in financial markets prompted the Fed to take a precautionary stance and put a rate rise on hold. Investors all but ruled out a rate increase in 2015 after the September decision but at the October meeting, the FOMC carefully worded its statement to signal to the markets that a December rate hike was a live possibility.

The dollar index rose to a 7-month high after the data, rising sharply against all major currencies. The euro broke below the 1.08 handle to fall to 1.0705 dollars in late European trading, while the pound dropped to 1.5028 dollars before recovering slightly to 1.5071. Against the yen, the greenback rose to an 11-week high of 123.08 yen but later eased slightly to 122.92 yen.

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