5 December, 2016
As we noted the day before Friday’s US jobs report, only a significantly worse-than-expected reading for November would have likely made the Federal Reserve’s next interest rate decision more difficult. A better-than-expected or in-line result would have simply reinforced the very high likelihood that the Fed would hike interest rates by 25 basis points on December 14. As it turns out, the jobs report was neither exceptionally positive nor overly negative, resulting in an expectedly muted market response and no appreciable change to the prospects of a Fed rate hike.
Mixed Jobs Data
On the optimistic side of the employment data, the headline non-farm payrolls (NFP) reading for November came out at a very solid 178,000 jobs added, slightly above the prior consensus forecast of 175,000 and falling on the higher end of our expected range between 160,000-180,000. Also on a positive note, the unemployment rate fell substantially to 4.6% from the prior month’s 4.9%.
As for the more pessimistic side of the data, however, wages were shown to have declined in November for the first time since February. Average hourly earnings came in at -0.1% against prior expectation of +0.2% and following October’s better-than-expected +0.4%. In addition, the NFP headline number was revised down from 161,000 to 142,000. While these latter data points do weigh somewhat on the overall US employment picture, however, they are very unlikely to serve as any deterrent to a December rate hike by the Fed.
Muted Market Reactions
As a result of the mixed data, the market reactions to the jobs report were relatively flat and muted in the immediate aftermath. The US dollar continued to waver in a modest pullback after having spent almost all of November in an epic rally. Gold was stabilizing in a slight rebound from its extreme lows, but still pressured overall due to the strong dollar and increasing interest rate expectations. US stocks were initially flat and possibly taking a bit of a breather after November’s Trump-driven rally to new all-time highs.
Upcoming Risk Events
Going forward, significant risk events for currencies and equities abound. On the immediate horizon is this Sunday’s referendum in Italy on constitutional reform. Depending on how the outcome unfolds, the vote could have serious repercussions on European equity markets, the euro, and safe-haven assets like gold.
Also potentially moving the beleaguered euro currency will be next week’s monetary policy meeting of the European Central Bank (ECB). This highly-anticipated meeting could see the ECB announce an extension of its substantial quantitative easing program, in which case the euro could be pressured even further.
And of course, as noted, the Fed policy decision will be announced less than two weeks from now on December 14. Futures markets are currently expecting around a 95% likelihood of a rate hike then. While much of this anticipation has already been priced-in to the dollar, there could possibly be some surprises from the Fed. Although unlikely, if the Fed keeps rates unchanged in December, the negative impact on the dollar and positive impact on gold would likely be exceptional. On the other end of the spectrum, if the Fed raises rates as expected but also hints at the likelihood of an increased pace of rate hikes in 2017 due to the anticipation of rising inflation, the dollar should continue to rally while gold would likely extend its plunge.
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