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Another strong US NFP report clears path for Fed rate hike

Nonfarm payrolls in the United States had another strong showing in November, rising by 211k and beating estimates of 200k. In further support of today’s solid rise, last month’s robust increase was revised up from 271k to 298k. The strong readings clear the way for the Federal Reserve to proceed with its first rate rise since June 2006.

The unemployment rate remained unchanged at 5% in November, while the labor force participation rate improved slightly to 62.5% from 62.4% in October. However, the underemployment rate, which measures the proportion of people that are in employment but underutilized in addition to those out of work, rose from the previous month, increasing to 9.9% versus estimates it would decline to 9.7%. This could be a sign that the labor force is not as tight as the headline rate suggests and there may still be some further scope for the unemployment rate to fall before wage pressures start to build.

There was some evidence of this in the latest average earnings figures. Average earnings slowed to 0.2% m/m from 0.4% the previous month, to give an annual rate of 2.3%. This is weaker than last month’s 2.5% y/y rate.

Another disappointing element of the employment report is the loss of jobs in the manufacturing sector. The strong dollar and lacklustre overseas demand has weighed on the sector and manufacturing payrolls declined by 1,000 in November to reverse last month’s gains of the same amount.

Despite some weaknesses in the labor market, the Federal Reserve is likely to view today’s data as further proof that the US economy is close to or at full employment. The Fed is widely expected to hike interest rates at its December 15-16 FOMC meeting and the latest jobs report is likely to be the final confirmation needed by Fed policymakers to press ahead with lift-off. With a December rate rise already priced in by the markets, investors will now be looking to see what message Janet Yellen will give on December 16 regarding the pace of future rate increases.

The dollar spiked up after the data but fell back soon after as most traders are now anticipating a gradual rate rise cycle post December. Yesterday’s ECB announcement, which largely disappointed the markets, has also helped ease the pressure from the diverging monetary policies between the two central banks. Investors will now be looking for signs of any further possible easing by the ECB in 2016 for direction.

The greenback jumped to 123.37 yen after the jobs report but was down at 122.85 yen in late European trading. The euro briefly dropped to 1.0862 dollars before bouncing back to 1.0943 dollars. The pound was more stable though and saw a more limited drop to 1.5080 dollars before rebounding to 1.5141.

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