Higher US Nonfarm Payrolls to Bolster Case for December Rate Hike

The US nonfarm payrolls report (NFP) on Friday will cap off a rollercoaster week for investors. Economists expect another month of robust job creation for the US economy, giving the Federal Reserve the justification it needs to begin raising interest rates later this month.

Friday’s report is expected to show the creation of 190,000 nonfarm jobs in November, according to a median estimate of economists polled by Bloomberg.[1] A separate poll conducted by Reuters shows expectations for an increase of 200,000.[2] The unemployment rate is forecast to hold at a more than seven-year low of 5%.

October NFP Report

US employers added 271,000 jobs in October, the biggest monthly increase since December 2014, the Labor Department reported on 6 November. Unemployment also fell 0.1 percentage point to 5%, the lowest level since April 2008. A separate gauge of labour earnings showed average wages expanded 0.4% in October, double the rate of forecasts and well above the September rate of zero.

The October NFP report crushed estimates, signaling to markets that the Fed would be ready to increase interest rates at its final policy meeting of the year on December 15-16.

Rate-Hike Bets Increase

Expectations for a rate rise spiked following the October NFP report, with US rate futures implying a more than 70% chance of tighter policy in December.[3] As a result, the US dollar surged 3% in November, reaching an eight-month high against a basket of world currencies.

The US dollar, which benefits from higher interest rates, has seen a burst of energy since July 2014, around the time market participants began speculating about a shift in US policy. The greenback has risen a staggering 24% over that period on the expectation of a rate rise. Although some observers suggest the dollar will continue to surge in the new-year, the extent of that momentum will probably be contained, given that higher rates have already been priced into the markets.

The Fed has also signaled that it is ready to move on interest rates, but stopped short of guaranteeing any action in December.

“While no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting [in December],” the minutes of the October Fed meetings revealed last month.[4]

According to analysts, the November NFP report is likely the last major report the data-dependent Fed will consider before reaching its decision.

Stock Markets Struggle for Direction

2015 has been a back-and-forth year for Wall Street. US stocks plunged more than 8% in the third quarter, capping off their worst quarterly performance since 2011.[5] One month later in October, stocks posted their biggest one-month rally in four years.

As the prospect of a rate hike loomed, November saw fewer of either extreme. The Dow Jones Industrial Average and S&P 500 Index were both little changed last month.

2016 is expected to be a challenging year for US equities, partly because of tighter monetary policy. A stronger dollar, emerging market weakness and concerns about overvalued equities will also drag on Wall Street. According to multinational investment bank Goldman Sachs, investors can expect a total return of 3% next year.[6]

Keep an Eye on NFP

The November NFP report will be released Friday, December 4 at 8:30 am ET. Traders may expect a high-volume session with lots of volatility, especially in stocks. It may very well be the last major trading day of the year in volume terms, as traders begin winding down for the holiday season.

[1] Bloomberg Business. Economic Calendar: Employment Situation.

[2] Lisa Twaronite (Dec. 1, 2015). “Global Markets – Asian shares rally, shrug off China PMIs.” Reuters.

[3] Lewis Krauskopf (November 19, 2015). “Dollar falls, U.S. stocks dip as Dec rate hike seen.” Reuters.

[4] Binyamin Appelbaum (November 18, 2015). “Fed Minutes Signal Readiness for December Rate Increase.” The New York Times.

[5] Nicole Bullock and Robin Wigglesworth (September 29, 2015). “Equities on course for worst quarter since 2011.” Financial Times.

[6] Akin Oyedele (November 24, 2015). “Goldman: Stocks will go nowhere in 2016.” Business Insider.

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