The most important economic release of the week arrived this morning and it was not a let-down. The official government employment data for October came in far stronger than expected in just about every way and suddenly the possibility of a Fed rate hike in December looks a lot more probable.
By Peter Martin
Friday, November 6, 2015
The language in the last Fed statement was quite clear that a rate hike was at play for December, specifically saying the FOMC would be considering ‘whether it will be appropriate to raise the target range at its next meeting’ and just in case there was any doubt, Janet Yellen stressed this week that should incoming information support the Fed’s expectation of further labor market improvements and inflation returning to target ‘then our statement indicates that December would be a live possibility’. With today’s report, both bases were covered, with not just clear advances in the jobs market, but also signs of wage rises that will boost the inflation outlook.
Non-farm payrolls growth jumped up to 271,000 in October, smashing the consensus estimate for a 190,000 rise, while revisions to prior months were minimal (and were actually net additive for September and August combined). This is the largest gain we have seen for this indicator since December 2014. The employment rate also improved, as we would have expected given the low jobless claims numbers we have been seeing, edging down to 5.0% from 5.1% to set a seven-year low. Jobs growth was almost exclusively driven by the private sector, with 268,000 added to private payrolls. The tightening labor market was emphasized further by a 0.4% increase in average hourly earnings, versus an expected 0.2% rise.
Barring a collapse in data between now and the December FOMC meeting, the chances seem very favourable for lift-off in 2015. The result in the forex market has been a sharp uplift to the US dollar against all its peers. The dollar index, a measure of the US dollar’s strength against a basket of six major currencies, jumped 1.3% in the wake of the report, climbing to its highest since April. EUR/USD plunged 1.48% to 1.0723, GBP/USD fell 1.0% to 1.5055, while USD/JPY climbed 0.98% to 122.95.
The Canadian dollar held up a little better on the back of Canada’s own bullish employment data for October, though the currency still slid substantially against the US dollar. The Canadian labor force survey had been expected to show a decline in October, but instead showed an increase in employment of 44.400, building momentum after the 12,100 jobs added in September. Furthermore, the unemployment rate ticked down from 7.1% to 7.0%, despite an upswing in the participation rate to 66.0%, the highest seen since last July (in comparison, the US participation rate remained steady at 62.4% in October). Some of the gloss is taken away by the fact that a majority of the gains in Canadian employment were part-time positions, though a 9000 increase in full-time jobs is still healthy. The data suggests a strong start to the quarter for the Canadian economy, and makes further easing this year from the Bank of Canada seem unlikely. USD/CAD rose 0.79% to 1.3274.
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