Stocks were mixed after October’s nonfarm payrolls report shatters expectations. The S&P500 fell fractionally to 2,099 while the Dow Jones gained 0.3% to 17,910. Data today showed that nonfarm payrolls rose by 271,000 last month compared to estimates of around 180,000. Similarly the unemployment rate fell to 5.0% from 5.1%. Another positive component of the report was that average earnings grew 0.4% in the month which was on the high end of expectations. Equities initially fell but finished the day strong as a result of optimism for the domestic US economy. This news makes a rate hike in December increasingly likely. Statements made by Janet Yellen last week and this week implied that if the economic data cooperated then a rate rise in December would be appropriate. To reflect this futures movements today priced in a 70% chance of tightening in December compared to just 56% before the report. The two year yield rose 5 basis points to 0.89% and was up 15 basis points on the week. The ten year yield rose to 2.33%. Similarly the dollar index appreciated 1.2% against peers to 99.78 and the euro fell 1.3% to $1.0737. The euro fell due to developments on both sides of the equation due to divergence between the ECB and the Fed. Predictably commodities such as gold and oil suffered.
With a Fed hike in December becoming increasingly likely attention is shifting to the trajectory of interest rates after the initial increase. With the strength of today’s report it will take some downside surprises out of additional data in order to deter the Fed from December. The Fed is of the belief that as the labor market tightens wages will increase which will put upward pressure on prices and inflation. Yesterday’s data was indicative of a 2.5% annual increase in average hourly earnings which is above the 1.5-2.3% which has been typical over the past six years. Analysts still expect Yellen to communicate “gradual” interest rate increases after the initial hike. Over the summer Stanley Fischer argued that instead of a “lift-off” the pace of interest rate increases will be “crawling.”
The British pound once again slipped in the aftermath of the BoE’s revised outlook and the imminent Fed rate hike. With these two contrasting fortunes the pound fell 1.1% to $1.5027 (dollars per pound). The pound traded at as high as $1.54 as recently as Wednesday leading up to Thursday’s BoE meeting as investors may have been expecting the MPC to announce a rate hike. The meeting instead delivered the opposite. Sam Hill an economist at RBC believes the gap between the Fed’s tightening and the BoE’s tightening is around 7 months which will put upward pressure on the dollar in the short term. Yields on UK gilts rose in the aftermath of Friday’s US data which is possibly indicative of markets expecting conditions for the two economies to move together.
Commodity prices fall in the aftermath of Friday’s data. As interest rates are expected to rise the US dollar is poised to appreciate against developed and emerging market currencies. Since commodities are priced in US dollars a stronger dollar results in reduced aggregate demand from foreign commodity buyers. WTI oil fell 2% to $44.29 while Brent fell 1.2% to $47.42. High supplies and prospects for higher interest rates have been a headwind for oil prices this week. Some investors see these losses as a buying opportunity, as rising interest rates would be indicative of a strengthening US economy which may increase demand for oil down the road. Similarly gold prices also fell 1.5% to close at $1,087.70. As interest rates rise it becomes less attractive to hold gold on a relative basis to bonds as it does not pay any type of dividend or interest.