Boom­ing US econ­omy gives Fed con­fi­dence

Financial Mirror (Cyprus) - - FRONT PAGE -

It’s all about the Fed. At least that’s what mar­ket an­a­lysts, cur­rency traders, bankers and in­vestors are fo­cus­ing on head­ing into the Fed FOMC meet­ing on De­cem­ber 15/16. In the run-up to the fi­nal Fed pow-wow of the year, all man­ner of eco­nomic data will be con­sid­ered be­fore any in­ter­est-rate de­ci­sion is an­nounced. We have seen from the Oc­to­ber meet­ing of the Fed­eral Re­serve that con­di­tions on the ground had im­proved dra­mat­i­cally, but not quite to the point where a rate hike could be jus­ti­fied.

The Oc­to­ber state­ment was sig­nif­i­cant in that no men­tion was made of China weak­ness or emerg­ing mar­ket economies. All ob­sta­cles have ef­fec­tively been cleared so that the only de­ter­mi­nants of a rate hike will be the strength of US data. Janet Yellen and other Fed pol­i­cy­mak­ers have not minced their words in their de­ter­mi­na­tion to raise in­ter­est rates grad­u­ally as op­posed to sharp and er­ratic hikes. On Wed­nes­day, Novem­ber 4, Yellen of­fered tes­ti­mony in Wash­ing­ton DC where she out­lined plans for a pos­si­ble De­cem­ber rate hike.

The Fed has sev­eral eco­nomic tar­gets in mind, in­clud­ing a 4.9% un­em­ploy­ment rate and 2% in­fla­tion. Both of th­ese mea­sures are on track to be­ing achieved, but are not quite there yet. On Fri­day, Novem­ber 6, the fig­ures for non-farm pay­rolls came in. The con­sen­sus es­ti­mate was 180,000, but the ac­tual num­ber of NFP jobs in­creased by 271,000. This fig­ure marks the steep­est gain since Jan­uary. NFP jobs in­creased be­tween Jan­uary and Fe­bru­ary, then plum­meted in March and grad­u­ally built up again. The de­cline be­gan in May when 260,000 jobs were added and con­tin­ued through to Septem­ber when the num­ber of NFP jobs added was 137,000. The present month saw a spike of over 134,000 jobs be­tween Septem­ber and Oc­to­ber.

The data is typ­i­cally re­leased on ei­ther the first or the last Fri­day of the month and has a sig­nif­i­cant im­pact on the USD. The US dol­lar in­dex was trad­ing at 99.15 for a gain of +1.9% af­ter the news, close to the 52-week high of 100.39.

By the end of the trad­ing week, the ef­fect of the NFP jobs re­port helped the ma­jor in­dices to fin­ish in the black. The Dow Jones In­dus­trial Aver­age closed at 17,910.33 for a gain of 1.4% for the week, the NAS­DAQ in­dex closed at 5,147.12 for a gain of 1.8% for the week, and the S&P 500 in­dex closed at 2.099.20 for a gain of 1% for the week.

As a re­sult of the NFP, un­em­ploy­ment moved from 5.1% to 5%. The Fed tar­get is well within range now, and this makes the like­li­hood of a rate hike in five weeks’ time a real pos­si­bil­ity. That the US un­em­ploy­ment rate is at a 7.5 year low is sig­nif­i­cant and it shows that quan­ti­ta­tive eas­ing poli­cies have worked in the US. In or­der to pro­tect the econ­omy from dis­in­fla­tion, and to re­tain a strong dol­lar, the Fed will likely move sooner rather than later. Of equal im­por­tance is the in­crease in hourly earn­ings, with a $0.09 in­crease recorded.

The Fed ef­fec­tively con­sid­ers the cur­rent un­em­ploy­ment rate con­sis­tent with full em­ploy­ment. The fig­ures that were re­leased re­cently coun­ter­bal­ance the weak­ness of the

pre­vi­ous two months.

Mar­kets didn’t waste any time re­act­ing to the pos­i­tive NFP re­port. The USD surged against a bas­ket of cur­ren­cies, and emerg­ing mar­ket cur­ren­cies plunged ac­cord­ingly. It is be­com­ing in­creas­ingly more ev­i­dent to in­vestors and cur­rency traders ev­ery­where that a rate hike is im­mi­nent. Such was the bullish sen­ti­ment in the fu­tures mar­kets that a 70% like­li­hood of a rate in­crease in De­cem­ber was recorded. Just a day ear­lier, that fig­ure was 58%. So sub­stan­tial was the NFP num­ber for Oc­to­ber that any­thing over 150,000 would have been con­sid­ered grounds for rais­ing the in­ter­est rate for the first time in nine years. Even those who op­posed the rate hike, such as Chicago Fed­eral Re­serve Bank Pres­i­dent Charles Evans, are now com­ment­ing that the US econ­omy is sub­stan­tially bet­ter. Dur­ing Septem­ber, a sur­vey by Reuters found that 71% of banks deal­ing with the Fed ex­pected a De­cem­ber rate hike, but that fig­ure has now jumped to 88% of banks. If we are to go by mar­ket sen­ti­ment, it is clear that the tra­jec­tory for a liftoff is just ahead of us.

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