Rate Hike Expectations for December Have Not Devalued November Jobs Data
It’s been another rollercoaster year for the US that has so far failed to deliver on any of the four rate hikes forecast by the Fed at its meeting almost 12 months ago, when it embarked on its first monetary tightening cycle since the financial crisis.
While the central bank has fallen well short of its own projections, not helped by a number of predominantly external shocks, it is widely expected to deliver on one of those hikes at the meeting in just under two weeks’ time.
In fact, markets have priced in a 99% chance of a hike at the meeting in December, a move that has sent the US dollar to a 13 and a half year high against a basket of currencies.
Source – CME Group FedWatch Tool 
With that in mind, one may wonder whether the November jobs report will actually influence the outcome of next meeting and whether we should therefore expect the same kind of volatility we’ve become accustomed to.
The first thing to consider here is the fact that with a rate hike so heavily priced in, the market is vulnerable to downside shocks in the jobs data on Friday. While it would take something pretty dramatic for investors to reconsider a December hike, a weak report could see a hike priced a little lower which would be bearish for the dollar and Treasury yields.
More importantly though, investors don’t just look ahead to the next meeting and as it stands, markets are only pricing in a single rate hike up to November next year, with the next coming in June. This suggests to me there’s still plenty of room to manoeuvre on expectations beyond this month, which means potentially more upside in the dollar and US 10 year yields, and downside in Gold.
With this in mind, the November jobs report will be just as important as the others. Not only will it tell us when the economy is slowing but also when it is vulnerable to overheating, which could encourage the Fed to up the pace of rate hikes.
With the average number of jobs created this year standing at just above 180,000 – well above what is necessary to remove the remaining slack in the labour market – unemployment at 4.9% and average hourly earnings rising at 2.8% annually in October, it’s not beyond the realms of possibility that the pace of tightening will need to pick up. Especially not if Donald Trump carries through on his fiscal stimulus pledge, which would likely bring additional inflationary pressures.
For more insight on what we can expect from the charts, check out our NFP Preview video below.
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