One Man’s Opinion: Will Negative Reports Before The December Fed Meeting Derail A Rate-Hike This Year?

ManThe latest non-farm payroll report has come as a relief for most market observers and makes Federal Reserve chair Janet Yellen’s job easier, said Diana Swonk, chief economist at Mesirow Financial.

The 271,000 job additions in October not only dramatically reduce chances of a dissent (for a rate-hike) in her inner circle, but also among Charlie Evans (out of Chicago Fed) who is voting at the December FOMC meeting. Evans was temperate in his comments about the latest job report anyways as one of the things that he has been waiting for – wage acceleration – has been partly achieved (wages grew at 2.5 percent annual pace).

While the labor participation rate has fallen short of expectations, the latest report gives the economy a chance to move at the right direction and affirms the belief the economy is strong enough to handle a rate-hike, she noted.

The strong jobs report dampened spirits in the equity market with stocks losing steam immediately. Asked why equities can’t be resilient when the unemployment rate has fallen to 5 Percent, David Kelly of JP Morgan Funds said stocks will eventually emerge resilient.

The up move in the US dollar is not particularly helpful after the report, but ultimately when the Fed does react and move rates higher, that would remove uncertainty. If the Fed were meeting tomorrow, they would almost certainly have moved rates; but the problem is that the next meeting would take place after five weeks.

While conditions right now are almost perfect (for a rate-hike), anything can go wrong in the next five weeks. JP Morgan believes markets will react positively when the Fed ultimately raises rates since that would remove uncertainty. There’s still some doubt, which is justified, about what the Fed’s actually going to do, he argued.

Wages grew 0.4 percent month-over-month in October and 2.5 percent since last year. Asked if the current growth-rate could be sustained, Diana said nobody knows if wages would continue to move in the right direction. However, the October consumer confidence report showed almost all of the improvement in sentiment came from very low wage workers, which really shows the minimum wage increases are benefiting them, and they are feeling better about it.

Also, hiring of lower wage workers helped. Another important point in the latest report was the increase in hiring in professional services; a lot of really entry-level jobs for new college grads were created in October and although entry-level wages are nowhere where they once were, they are starting to firm up.

Clearly there has been a bottoming of wages in a lot of sectors with the exception of the oil industry though wage declines are abating in the mining sector overall. The latest report gives the sense of stabilization; it’s not a continued surge since wage growth has really moved in fits and starts, it surely shows the economy has hit a tipping point.

While there’s still slack in the US economy, it’s likely the next phase of Yellen’s plan will be revealed shortly, which is to push unemployment below 5 percent and re-engage those workers that are not engaged in the labor-force currently, she concluded.

You can watch the video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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