Monday, November 9, 2015

October jobs growth supports December "lift-off"

After a couple of soft months US jobs growth bounced back with a vengeance in October.  Non-farm payrolls rose +271k over the month, well ahead of average market expectations of +180k.   Adding to the strength in the result the unemployment rate dipped lower to 5.0% and wage growth blipped higher.

This result sees jobs growth back to a solid upward trend, supporting our view that solid consumer spending will continue to be the back-bone of above-trend GDP growth in the period ahead.  That tips the scales further in favour of a December “lift-off” for interest rates.  Indeed market-based probability of a hike in December now sits at 68%.

Average hourly earnings were up +0.4% in the month for an annual increase of 2.5%.  The unemployment rate is now within the Fed’s central tendency for full-employment and the broader U6 measure of labour market is slack is now at 9.8%, its lowest level in five-and-a-half years.

The Federal Open Market Committee will see this for what it is – an unambiguously strong result.  We know the Committee, either rightly or wrongly, operates within a Phillips Curve framework.  So a combination of diminished labour market slack and rising wages will have them itching to tighten.  Barring any data-disasters between now and mid-December, a rate increase before Christmas is looking like a done deal.