The US economy had a blockbuster October.
US companies added a whopping 271,000 jobs during the month, crushing expectations for an increase of 185,000. This helped bring the unemployment rate down to a 7-year low of 5.0% from 5.1% a month ago. Even the U-6 “underemployment” rate tumbled to 9.8% from 10.0%.
Importantly, wages jumped with average hourly earnings growing at a 2.5% rate, the highest rate since 2009.
All of this has implications for the direction of monetary policy. Indeed, traders are now pricing in a 70% likelihood that the Federal Reserve will lift rates in December, which would be the first such hike since June 2006. An initial rate hike from the Fed would signal the end of extremely loose, zero-interest rate policy, which it introduced in December 2008 in its effort to stimulate the economy out of the the financial crisis.
“We’ve indicated that conditions look like they could be right for an increase,” Chicago Fed President Charles Evans said to CNBC on Friday. “The real side of the economy is looking a lot better.”
“We are doing about as good as we could ever do,” St. Louis Fed president James Bullard said at an event in St. Louis.
But the tone at the Fed is not unanimous. Indeed, Fed Governor Lael Brainard remains concerned about the slowdown overseas. “The ability to offset spillovers from adverse developments in foreign economies with conventional policy is constrained, suggesting greater caution than normal,” Brainard told a conference sponsored by the International Monetary Fund.
This week comes with a lot more “Fedspeak” from America’s monetary policymakers. So as we prepare to engage in some Fed Kremlinology, here’s your Monday Scouting Report:
- All ears on Fedspeak.Economists, analysts and investors will all be obsessing over every word coming from Fed speakers. After all, that’s what former Fed Chair Ben Bernanke would probably recommend. Here’s Wells Fargo’s Sam Bullard with what’s coming up: “…Looking ahead to this week, on Monday, Boston Fed President Rosengren (2016 voter, dove) speaks in Portsmouth, RI on the U.S. economy. Thursday is a busy day with multiple Fed speakers — St. Louis Fed President Bullard and Richmond Fed President Lacker (voter, hawk) speak in Washington at a monetary policy conference hosted by the Cato Institute; Fed Chair Yellen (voter, dove) gives the welcoming remarks at a Fed policy conference titled “Monetary Policy Implementation and Transmission in the Post-Crisis Period”; Chicago Fed President Evans speaks in Chicago on monetary policy and the U.S. economic outlook; New York Fed President Dudley (voter, dove) speaks in New York on the U.S. economic outlook and what it means for monetary policy; and Fed Vice Chairman Fischer (voter, moderate) speaks in Washington on financial stability and monetary policy. On Friday, Cleveland Fed President Mester (2016 voter, hawk) speaks in Cleveland on the U.S. economy and monetary policy. Bottom line, the financial markets will be interested to see whether there is a coalescing of Fed officials’ opinion over the increased probability of a December rate hike.”
It would take a “disaster” to keep the Fed from hiking in December. After the Fed’s October FOMC statement, economists increasingly warmed up to the idea that the first rate hike would come in December. And after Friday’s huge US payrolls report, more and more economists were comfortable saying that a December rate hike was a “done deal.” Even Barclays’ Michael Gapen, who was among the minority forecasting the first rate hike to come in March 2016, flipped and moved his call to December.
Here’s what others on Wall Street are saying: Goldman Sachs’ Jan Hatzius: “The October employment report was solidly better-than-expected, and we now see a rate increase from the FOMC at the December meeting as very likely.” Bank of America Merrill Lynch’s Ethan Harris: “We have been arguing that ‘something bad’ has to happen to stop the Fed; now we think ‘something really bad’ has to happen to stop them.” UBS’s Drew Matus: “[C]ancel December 16 vacation plans.” BNP’s Bricklin Dwyer: “[The] payrolls report meets the Fed’s threshold for hiking rates in December, but we need to see the positive string of data continue and no major financial market shocks.” Capital Economics’ Paul Ashworth: “Unquestionably, [the falling unemployment rates] will be enough to convince Fed Chair Janet Yellen and Vice Chair Stanley Fischer to vote for a rate hike at the next FOMC meeting in mid-December.” Pantheon Macroeconomics’ Ian Shepherdson: “Barring a disaster in November, rates are going to rise in December.” PNC’s Stuart Hoffman: “Federal Reserve Chair Janet Yellen will testify before Congress on December 3, and she is likely to clearly signal that a 25 basis point increase in the federal funds rate is coming at the December 15-16 FOMC meeting.” RBC’s Tom Porcelli: “The case for December was made prior to this payroll report.” Societe Generale’s Aneta Markowska: “Financial conditions and further dollar strength remain potential hurdles, but we expect the Fed to manage this by delivering a dovish rate hike at the December meeting (as we expected in September).” Deutsche Bank’s Joe LaVorgna: “[T]he latest labour news will further embolden Fed members who want to raise rates next month. Whether the Fed ultimately decides to raise rates at the December 15-16 FOMC meeting will depend on the significant amount of data still to be released between now and then. The behaviour of financial markets will also be taken into consideration by policymakers.”
- Initial Jobless Claims (Thurs): Economists estimate initial claims slipped to 270,000 from 276,000. Here’s Bank of America Merrill Lynch: “We expect initial jobless claims to improve to 270,000 for the week ending November 7, partially reversing the gain to 276,000 in the prior week. If our forecast proves correct, the 4-week moving average would rise to 266,250 from 262,750, which would still be a healthy low level of firings.”
- Job Openings & Labour Turnover Survey (Thurs): Economists estimate US companies had 5.385 million job openings in September. Here’s Credit Suisse: “Job openings fell to 5.4M in August after rising sharply in July to 5.7M. But with further declines in unemployment, the drop in openings pushed the ratio of vacancies to unemployed workers down only slightly to 0.67 from 0.69. The August V-U ratio was still above the 2006-2007 peak and was the second-highest reading since 2001. The JOLTS numbers suggest the underlying health of the labour market continues to improve at a fast clip. However, the considerable tightness in the labour market is not yet translating into accelerating wage pressures. Measures of job turnover, which tend to lead wage acceleration, remained lukewarm. The rate of job quits was unchanged and has now stagnated for nearly a year.”
- Retail Sales (Fri): Economists estimate sales increased by 0.3% in October. Excluding autos and gas, core sales climbed by 0.4%. Here’s Nomura: “Retail sales surprised to the downside in September, suggesting that consumer activity lost some momentum in the latter part of Q3. Consumer spending has been one of the main drivers of growth this year, so any sustained slow pace of consumer activity could raise some concerns about the US economy. We expect to see some bounce back in retail sales in October, as consumer fundamentals continue to be favourable.”
- Producer Price Index (Fri): Economists estimate producer prices climbed by 0.2% month-over-month in October, while falling 1.2% year-over-year. Excluding food and energy, core prices are estimated to have climbed by 0.1% and 0.5%, respectively. Here’s Wells Fargo’s John Silvia: “Energy prices were more stable in October, which likely supported headline prices in the month. Despite the dramatic swings in the headline number, core PPI has softened as well. Broad-based declines in commodity prices have pulled down the goods index, while services have held up somewhat better. We expect the producer prices ticked up slightly in October. The import price index is also set to be released next week, and energy will likely weigh on the index once again. The dollar was weaker on balance in October, which may soften some of the impact of lower energy prices.”
- U. of Michigan Sentiment (Fri): Economists estimate this index of sentiment improved to 91.5 in November from 90.0 in October. Here’s Barclays: “With positive economic momentum, as evidenced by strong motor vehicle sales and low jobless claims, we expect consumer sentiment to trend higher in the coming weeks.”
Despite the strong jobs report, which increased the odds the Fed would tighten monetary policy sooner than later, the stock market didn’t sell off. Rather, it closed on Friday effectively unchanged.
In the coming weeks, Wall Street strategists will unveil their outlooks for the stock market in 2016. For now, some are reflecting on how far we’ve come.
“I don’t know about you, but to me it feels like these past 6-plus years were a particularly challenging (and often tiring) global cycle,” Morgan Stanley’s Neil McLeish said in his Sunday Start note. “The S&P500 is back within a few points of a new cycle high, but it is hard to feel good about the world. I guess we can blame a rolling series of debt-related problems along the way, morphing from the eurozone crisis almost seamlessly into an EM bear market that gathered ferocity this past six months. Or perhaps this is what all bull markets are supposed to feel like: a wall of worry.”
It’s an unconventional take. But arguably a sound one. The idea here is that there were always uncertainties out there that prevented investors and traders from going all in, which prevented the market from getting ahead of itself.
“At some level … it is the lack of synchronisation that has kept the global cycle intact,” McLeish articulated. “Our economics team has long argued that an unsynchronized global cycle implies a lack of overheating and an ever-ready supply of central bank ammunition to tackle post-crisis disinflationary pressures. Hence, the wall of worry performs a fundamental as well as its more traditional psychological purpose.”
Obviously, if unsynchronized growth is a good thing for the markets, than the opposite must be true, right?
“To my mind, a China mini-cycle-led reacceleration of global growth combined with somewhat higher DM inflation is a realistic 2016 scenario not fully priced by markets,” McLeish continued. “Given the great global growth scare of 2015, our Chief US Equity Strategist Adam Parker likes to say that ‘good is good’. In the near term, this sentiment makes sense to me. However, I can’t help thinking that a more synchronised upswing for the global economy would ultimately be a less good thing for global markets. But we’ll worry about this scenario if and when we get there.”
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