The October jobs report was a blowout, with the economy adding way more jobs than expected as wages rose faster than forecast.
And as a result, Michael Gapen and his team at Barclays have reversed their August call for the Federal Reserve to wait until March 2016 to raise interest rates and now think the Fed will hike in December.
“We are moving the Fed call to a December rate hike,” Barclays wrote in a note to clients following Friday’s report.
The firm added:
The October payroll report was very solid and exhibited broad-based strength. It suggests that labour markets have fully rebounded after slowing in August and September. When we moved our rate hike assumption to March 2016, we assumed that the volatility in financial markets would be longer lasting and the Fed would have trouble resolving their differences about the viability of rate hikes before year-end. The October FOMC statement and Chair Yellen’s testimony to Congress were more hawkish than expected, suggesting the committee saw downside risks from global developments as having diminished and activity pointing to a “live possibility” of a rate hike in December. This change in communication, the faster dissipation in uncertainty, and a very solid payroll report necessitate a change in our call to December. We now forecast a federal funds range of 25-50bp in December, up from the current 0-25bp.
On Friday, the October jobs report showed the economy added 271,000 jobs while the unemployment rate fell to 5% and average hourly earnings rose 2.5% over the prior year.
Economists were looking for job gains of 185,000, so this was a big beat. But perhaps the most encouraging part of the report was wage growth, which rose faster than expected and appeared to indicate the final piece of the Fed’s labour market puzzle coming into focus.
But so back in August, Barclays pushed its call for a September rate hike out a full six months to March 2016. This call was particularly notable because it came on August 24, the day the stock market saw something like a “flash crash” as worries over economic growth in China sent the Dow down as many as 1,000 points.
Following Friday’s jobs report, markets were pricing in a roughly 70% chance the Fed would raise rates in December, and so Barclays is now coming back from sticking their necks out on a big call for the Fed to be in-line with consensus.
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