Strong U.S. October jobs report increases possibility of Fed hiking rate in December

The October jobs report of the U.S. was strong despite the moderate growth of headline employment, which grew 161,000. Apart from the strong figures for the month of October, the figures for August and September were upwardly revised by a total of 44,000. Furthermore, the average hourly earnings were up 2.8 percent on a year-on-year basis.

Looking at the strong growth in jobs and the growth pickup in the second half, the U.S. Fed is very much expected to hike its interest rate in December, noted Danske Bank in a research note. According to the November statement of the FOMC, the case for a rise in the interest rate ‘has continued to strengthen’, but the central bank would like some more evidence of the continued development towards its objectives.

Several members of FOMC see the Phillips curve and think that a tighter labor market results in increased wage growth, implying higher underlying inflation pressure, said Danske Bank. U.S. Fed chair Janet Yellen, especially, would welcome the drop in the underemployment rate. The U.S. election is a risk to the forecast of a December hike; however, a Trump victory is unlikely to alter the central bank’s perception of the economy.

“We are likely to see a lower risk appetite in the very short run but, based on the Brexit experience, the financial markets will rebound before the FOMC meeting in December and we will not see a major impact on confidence indicators”, added Danske Bank.