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Today's figures suggest that the labor market is back on track after a short pause which was probably induced by the Fed's excessive focus on international developments following the September FOMC meeting.
"We believe that this may have prompted some employers to hold off on making job offers until some of the uncertainty was resolved. Fortunately, the FOMC redeemed itself in October by showing leadership and refocusing its guidance back on the data (rather than on markets). This, in turn, gave employers the confidence to resume hiring. Bottom line, the US economy has created 206K jobs per month so far this year and 215K over the past six months", says Societe Generale.
This pace is expected to continue over the next 12 months. This will push the unemployment rate below 5% by the end of this year and to 4.5% by the end of next year. Perhaps the most important takeaway from today's report is that shrinking slack is finally starting to exert some pressure on wages. In other words, the Phillips curve is coming back to life!
Since the October FOMC meeting, Fed officials have been signalling a greater willingness to lift rates in December, subject to data continuing to improve. The rebound in hiring and the acceleration in wage growth should certainly increase the Committee's confidence that inflation will return to 2% over the medium-term. Prior to today, economists were pegging the probability of a December liftoff at 45%.
"We believe it has risen substantially today and would now put the odds at 70%. Financial developments remain a potential hurdle. Although interest rate futures are now essentially discounting a December rate hike, the curve is still pricing only two hikes per year thereafter. As the trajectory is repriced higher, this will likely put further upward pressure on the dollar. We assume that the Fed will try to lean against this pressure by underscoring gradualism and data dependency. In other words, expect a dovish hike in December", added Societe Generale.
