Robust US jobs market boosts December rate hike chances
The robust October jobs report from the US strengthens the case for a Federal Reserve interest rate hike in December, countering recent expectations that a move was less likely. Per the full note from ING, non-farm payrolls increased by 165,000, significantly above the forecast of 75,000, and the unemployment rate dropped to a more favorable 4.1%. This positive shift brings the market back to pricing a 20 basis points hike for the upcoming FOMC meeting, amidst a backdrop of solid wage growth and revisions of prior data that suggest persistent economic strength.
What the desk is arguing
The strong job gains reported in October bolster the Fed's path toward a potential rate hike in December. According to the data, the job additions not only surpassed expectations but also reflected positive trends in wage growth and unemployment, signaling labor market resilience. This narrative is pivotal as it reassures markets about the Fed's commitment to controlling inflation amidst ongoing economic development.
Notably, the revision of previous payroll numbers, which included an upward adjustment of 84,000, adds credibility to the perceived robustness of the labor market. The increase in manufacturing jobs by 19,000, and overall wage growth of 0.4% month-on-month, have been particularly noteworthy indicators for policymakers looking for a sustainable economic recovery. This data aligns closely with the Fed’s recent communications on necessary monetary tightening strategies.
Where it sits in our coverage
As of now, our consensus target for USD performance is 1.075, within a range of 1.04 to 1.12, echoing sentiments from firms like jpmorgan (targeting 1.10 by Mar26) and contrasting bofa (holding a more cautious target of 1.04 for the same tenor).
This perspective aligns well with jpmorgan's bullish stance on continued economic resilience leading to a later rate increase, while bofa remains wary of potential headwinds that might affect these projections. Our call is at the midpoint of the range, reflecting a balanced approach to the current market dynamics.
How other firms see it
Broadly, aligned firms such as jpmorgan anticipate that continued job growth will drive USD strength in the near-term, reflecting a confidence in the Fed's strategy. On the other hand, bofa presents a more cautious view, arguing that risks may limit the Fed's capacity to raise rates aggressively.
Market observers should pay close attention to the USD movement, particularly against pairs like EUR/USD, as expectations for future Fed decisions will likely influence cross-currency dynamics significantly. The relative strength of the US labor market will play a crucial role in shaping these trajectories.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Robust US job additions for October bolster the argument for a December Fed rate hike.
- 02Non-farm payrolls registered a significant increase of 165,000 against a forecast of 75,000.
- 03Wage growth and lower unemployment inject further confidence into the Fed's monetary strategy.
Market implications
Traders should monitor the USD, particularly against the EUR/USD, as market participants reassess the Fed's tightening path based on labor market data. A firm print could push USD upwards toward our consensus target.
Risks to this view
A reversal to bearish sentiment may occur if subsequent data suggests a weakening in job growth or signs of an economic slowdown, undermining current expectations for a December rate hike.
Articles Robust US jobs market boosts December rate hike chances Published 14:02 United States Translate Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The Federal Reserve has been focusing more on inflation recently, but a strong jobs report for October makes a December rate hike an even easier decision James Knightley US non-farm payrolls in October were above expectations with manufacturing showing signs of life 165,000 Jobs added in October Jobs up, unemployment down, wages growth holding up The October US jobs report looks very decent. Non-farm payrolls rose 165k versus the 75k consensus forecast and there were 84k of upward revisions to the past two months’ data. The unemployment rate dropped to 4.1% from 4.2% and wage growth rose 0.4%MoM/3.1%YoY versus the consensus prediction of 0.3%/2.9%.
That certainly helps the case for a December Federal Reserve interest rate hike, expectations for which had slipped in recent days to make it close to a 50:50 call at one point. We are now back to 20bp priced for the December FOMC meeting, and we fully expect the Fed to deliver at that meeting. The details show that, yet again, it is private education and healthcare services leading the gains (+53k), but manufacturing is showing real life with a 19k increase as it becomes increasingly competitive to produce certain products in the US.
Secure and relatively low-priced energy, a strong economy, huge tech investment spending and, at the margin, tariffs, have all boosted the sector. Manufacturing has now added 86k jobs over the past five months after three consecutive years of decline. Other sectors that performed well include temporary help (+19k) and transport and warehousing (+25k), but leisure and hospitality sank 13k with construction employment falling 3k.
Cumulative job gains since December 2022 (000s) Souerce; Macrobond, ING "> Souerce; Macrobond, ING Fed set to hike in December, followed by a long pause The Federal Reserve is focusing more on the inflation aspect of its mandate right now, but a stronger jobs story remains important for the rate hike narrative. While we do expect a December rate rise, we continue to doubt the need for additional hikes next year. The market has moved in that direction in recent days so that it no longer fully prices additional hikes in 2027, presumably because of the big drop in energy prices and diminished fears of second-round price effects.
Next week's CPI report is expected to show core CPI rising by 0.2% month-on-month, which should support that story. US Unemplyoment Jobs Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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