Market bets on a December Federal Reserve rate hike climbed to 78 percent after the October jobs report, reversing the shift to March that followed Thursday stock selloff and reshaping the rate path for the second time in two days. Interest rate traders had pushed back the expected timing of the next rate hike to March after Thursday rout, in the clearest sign yet that the market believed the economy had changed. Friday jobs report changed it back, and the hike is now priced for December again, with the CME FedWatch Tool putting the odds back up toward 80 percent.
Why it matters
The reason is the number itself. Employers added 165,000 jobs in October, more than two and a half times the 65,000 economists had expected, and the unemployment rate dipped to 4.1 percent from 4.2 percent. The report also revised August payrolls up to 186,000 from 133,000, and September up to 60,000 from 29,000, a combined upward revision of 84,000 jobs. A payroll figure close to the consensus could have steadied nerves, but the actual figure did the opposite: it argued that the economy does not need relief, and that the Fed inflation fight still has a strong labour market underneath it.
The market reaction was swift and broad. The 10 year Treasury yield rose about 4 basis points to roughly 4.87 percent, and the 2 year yield, which is especially sensitive to expected changes in the federal funds rate, climbed about 5 basis points to around 4.52 percent. The dollar index gained about 0.7 percent to 102.22, its biggest daily gain in nearly five months, and spot gold fell nearly 1 percent to about 4,050.95 dollars an ounce. The bond and currency markets moved first, and the stock market followed, with the Nasdaq rising 1.09 percent on Friday even as the Dow fell 0.46 percent, in a split that held all day.
What happens next
The Federal Reserve context makes the shift unusually consequential. At its October 28 meeting the Fed held its benchmark rate at 3.75 to 4.00 percent on a 10 to 2 vote, with two dissents actually wanting to hike further, and inflation ran at 3.7 percent over the year to September, well above the target. The case for a December hike rested on that inflation, and on a labour market that, while cooling, was not breaking. Thursday selloff had changed the market judgement about whether the Fed will act on it. Friday jobs report changed it back, and the hike is now the base case again.
What happens next will be decided by data, starting with the October consumer price report on Tuesday, November 10, the last inflation reading before the Federal Reserve December 8 and 9 meeting. A hot inflation number would strengthen the case for a December hike and could push the odds higher still, while a cool one would let the Fed wait and could send the bets back to March. For now, the message from the bond market is patience in reverse: the hike is still coming, and it is coming sooner than traders thought on Thursday. The rate path has swung twice in two days, and it may swing again.
