CHART: US jobless claims are falling and that bodes well for payrolls growth and a potential rate hike in December

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Last week US initial jobless claims — first time filings for unemployment insurance — fell to 249,000, close to the lowest levels seen this year.

The decline took the four-week moving average, a measure that helps to smooth out week-to-week volatility, to 253,500, the lowest level since December 8, 1973.

More than 40 years ago.

According to ANZ, the decline in jobless claims bodes well for tonight’s September non-farm payrolls report, as demonstrated in the chart below supplied by the bank.

It shows the monthly change in payrolls numbers going back to 1990, overlaid against initial jobless claims over the same period. The latter has been inverted by ANZ, and clearly has a strong relationship to total payrolls growth.

Should the relationship between the two be maintained, it will likely see expectations for a US rate hike in December continue to firm, continuing the move seen over the past two weeks that followed the release of strong US economic data.

The odds of a 25 basis point increase in the Fed funds rate in December is currently priced at 62%.

“September’s non-farm payrolls will be important in helping firm market certainty over a December rate move. The consensus is for a rise of 174,000 jobs with the unemployment rate holding steady at 4.9% and average earnings rebounding to 2.6% y/y,” says ANZ.

“That would leave job gains in line with the 180,000 average monthly increase so far this year – which is more than sufficient to be consistent with a reduction in the unemployment rate over time.”

Using the Atlanta Fed jobs calculator and holding the participation rate constant at 62.8%, ANZ calculates that average payrolls growth of 180,000 per month over the next year would reduce the US unemployment rate to just 4.4%.

If that was to eventuate it would mean a very tight US labour market, and in all likelihood an environment that would be conducive to a pickup in wage growth and inflation.

The US payrolls report will be released at 11.30pm AEDT. You can find more information on the release here.

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