Let’s skip the formalities: today’s NFP report was essentially perfect. The marquee US (and global) jobs report showed that the world’s largest economy created a stunning 271k jobs, crushing economist’s best estimate of 181k and the previous report’s negatively-revised 137k reading.
While our forecast was above consensus, even we didn’t anticipate such a stellar report. Beyond the headline number of jobs created, the under-the-surface details were just as strong. As expected, the unemployment rate fell by 0.1% down to just 5.0%, a 7.5-year low. Meanwhile, average hourly earnings rose by 0.4% m/m, crushing the estimated 0.2% gain and suggesting that last month’s flat reading was an aberration. With this sign that wages are starting to pick up meaningfully, the Fed will have a difficult time rationalizing leaving interest rates unchanged in December.
In fact, when it comes to the Federal Reserve’s rate-hike plans, the most important tidbit from today’s NFP report wasn’t even in the report. Throughout this year, stocks have tended to fall when NFP beat expectations as traders feared that the Federal Reserve would raise interest rates. In the wake of today’s essentially perfect report, though, US equities have actually rallied to a nearly 3-month high. This bullish reaction shows that the market is implicitly giving the Fed permission to raise interest rates, unlike the “Taper Tantrum” of 2013 and the big swoon a few months ago. In other words, the dog (Fed) has started to wag the tail (markets) once again.
Not surprisingly, the implied odds of a Fed rate hike next month have skyrocketed, according to the CME’s FedWatch tool. From around 60% before the report (and as low as 30% a few weeks ago), futures traders are now pricing in a 70% chance the Fed will increase interest rates next month, and we agree with this assessment. At this point, it seems like only a string of disappointing economic reports to dissuade the Fed from acting next month, something we don’t anticipate at this time.
Market Reaction
The market’s reaction to the jobs report has been sudden and dramatic. The US dollar has surged across the board, with the dollar index gaining over 1% to trade back at 99.00, above key previous resistance in the 98.00-50 area. At the same time, EUR/USD has dropped through key previous support at the 1.0800 area, USD/JPY is solidifying its breakout above the 121.50 resistance level and gold has dropped to within 10 points of its 5.5-year low at 1080. As noted above, US equities are ticking higher and the yield on the 10-year benchmark government bond is rising 8bps to 2.31%.
In our view, these trends could last throughout the rest of the day and stretch into next week as more and more traders become convinced that the Fed is likely to act in December.