Bets on December Fed Rate Hike Reach 77% After 165,000 Jobs Added
Key Facts
The probability of the Federal Reserve raising interest rates in December rose to 77% on November 6, up about 10 percentage points from the previous day, after a jobs report showed 165,000 jobs were added in October. The Associated Press cited data from CME Group’s FedWatch tool showing investors raised their estimates of the likelihood of an increase after the report was released. Job growth exceeded EL7’s forecast of 65,000 and the average monthly gain of 48,000 jobs over the previous twelve months. These bets indicate how markets are pricing the possibility of Fed action, but do not represent a decision made by the central bank. Investors are now watching inflation data, which could add a new indicator to the monetary policy debate before the December meeting.
The unemployment rate also improved, reaching 4.1% in October, down from 4.2% in September and below EL7’s forecast of 4.2%. The Bureau of Labor Statistics said the unemployment rate and the number of unemployed people, at 7.1 million, “changed little” during the month. The unemployment reading adds to a picture of a labor market that has continued to expand despite a slowdown in average monthly gains compared with the increase recorded in October. Average hourly earnings for private-sector, nonfarm employees rose 14 cents, or 0.4%, to $38.00. On an annual basis, average hourly earnings increased 3.1% in the twelve months through October, a development that puts wage growth among the factors used to assess price pressures.
The job gains were concentrated in three major sectors, according to the Bureau of Labor Statistics. Professional and business services added 70,000 jobs in October, the largest contribution among the sectors cited in the report. Health care employment increased by 42,000, while transportation and warehousing added 25,000 jobs. These gains were spread across professional services, health care and transportation, together accounting for a large share of the total increase of 165,000 jobs. Sector data show where October growth occurred, while the total remains the broader measure markets track when assessing the strength of labor demand.
The bureau also revised its estimates for the prior two months higher, lifting the recorded level of employment in the recent period. The August gain was revised up from 133,000 to 186,000 jobs, and September’s increase was revised from 29,000 to 60,000 jobs. As a result, August and September employment was 84,000 jobs higher in total than previously estimated. These revisions accompanied an October reading stronger than the prior average, charting a higher path for employment than the data showed before the update. The revisions to previous months do not change October’s figure, but they raise the combined estimate of gains recorded over the three months.
The report quickly affected pricing in financial and currency markets. Reuters said fed funds futures priced in a probability of about 80% for a quarter-point increase in December after the data, compared with about 75% before. The dollar index rose 0.77% to 102.26, while the euro fell 0.67% to $1.11437. The yield on two-year U.S. Treasury notes also rose 4.1 basis points to 4.52%, and the 10-year yield increased 1.6 basis points to 4.85%. In equities, the S&P 500 rose 0.3% and the Nasdaq gained 1.1%, while the Dow Jones fell 0.5% in Friday’s session.
The shift in December bets follows the October meeting, when the Fed kept its target range for interest rates between 3.75% and 4% in a 10–2 vote. The two dissenting members preferred a quarter-point increase in the range, while the committee said economic activity was expanding at a strong pace and inflation remained elevated. After the jobs report, New York Federal Reserve President John Williams said U.S. economic growth had remained resilient, but stressed that inflation was “higher than it should be” and that bringing it back to the 2% target was necessary. This places economic and labor-market strength alongside persistent inflation in the background of the debate over the next decision. The Federal Open Market Committee had scheduled its next meeting for December 8 and 9, a meeting associated with the Summary of Economic Projections.
The October consumer price index will be released on November 10 at 8:30 a.m. Eastern time, according to the schedule published by the Bureau of Labor Statistics. The inflation reading will be among the upcoming data investors are watching as they track bets on a December rate increase. The inflation release comes before the Federal Open Market Committee meeting scheduled for December 8 and 9. The next jobs report, covering November, is scheduled for release on December 4 at 8:30 a.m. Eastern time. The period before the meeting therefore includes October inflation data first, followed by the November jobs report before the meeting begins.