Good Enough Jobs Report Makes Rate Hike Likely
The Economist today used a very British slang word, “stonker,” in comparing what November’s Nonfarm Payroll would have to be, compared to October’s, for the Fed to do what Chair Yellen has been hinting they would do: raise rates this month.
By Vikram Rangala
Friday, December 4, 2015
“Stonker” means especially large or impressive and is used mainly by people who still live in the 1940s or write for theEconomist, but the word was apt. November’s job creation number would only have to be “better than dire” after October’s “stonker” of a jobs report. With 211,000 new nonfarm jobs created, it was less than dire and a rate hike appears more likely.
US stocks responded to the report with an early rally, the Dow up over 150 points in the hour after the open, the S&P 500 up 15. November marks the 69th consecutive month of net job creation for the US, with the last three years being the strongest period of job growth since 2000, outpacing the period of the pre-crisis housing bubble.
The unemployment rate remained officially at 5%, matching expectations expressed in economist surveys.
The Fed has in the past pointed to the need for sustained wage growth along with job growth. While November wage growth slowed from October’s overall stonking, it remained a healthy 2.3%.
The reason wage growth matters to the Fed, besides its larger mission of full, healthy employment for Americans, is that wage growth supports inflation. Inflation, or higher prices, means successful businesses can have more profit to reinvest into higher more people and paying them even better. That better pay in turn means people can buy more and better stuff and services. It’s the virtuous cycle that drives an economy.
Forgive that Econ 101 recap but the fact is, every firm that lays off workers simply or even partially to increase quarterly profits to please shareholders is ignoring that basic lesson. As is every company that fails to reinvest in itself and siphons profits to C-suite compensation or waste of various kinds. Such mismanagement was a pre-crisis mistake the Fed does not want to see repeated (and which already is). Wage growth has been unusually weak in this recovery, despite the record job creation. CEO pay has soared.
European stocks, which plummeted Thursday following the ECB’s announcement that it would only loosen monetary policy to a degree less than the markets had priced in, appeared to stave off another day of losses on the positive US developments.
Besides the meetings of the US and European central banking committees, the other big international meeting is OPEC. Saudi Arabia has insisted that the cartel will not reduce output unless non-members like Russia and the US cut production, too. This forces smaller OPEC producers, including those with weaker economies, to continue struggling with lower export revenue. Saudi Arabia fears new competition from Iran once sanctions are lifted and from Iraq, if and when that country can start pumping closer to capacity. In the meantime, the Saudis know they are rich enough to withstand lowered income from oil exports. And if their OPEC partners are not, for now that’s tough luck in a fight for market share.
The Saudis are also richer, we might note, than ISIS, which gets part but not most of its income from oil and which is reportedly struggling to extract enough revenue from taxes in their occupied territory and from criminal activity. And outside OPEC, no country is going to complain about lower gas prices for their citizens, which is why the markets are so unconcerned with the OPEC meeting. Low oil prices are already priced in for months to come.
So for once, the boring bankers are the hot news, not the glamorous sheikhs and oil ministers. Which is surprising since the ECB’s deposit rate cut was a tiny 0.1% and the Fed’s rate hike, if it happens, is almost certainly going to be the minimum 0.25%. Or in other words, not much of a stonker.
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