US: Fed more confident after October NFP - Danske Bank

According to Mikael Olai Milhøj, Senior Analyst, at Danske Bank today’s NFP showed higher wage growth and less slack that makes the Federal Reserve more confident about rising interest rates. 

Key Quotes: 

“In our view, the jobs report for October was solid despite moderate headline employment growth of 161,000. First, it was good news that August and September were revised up by a total of 44,000. Second, both the unemployment and underemployment rates fell, suggesting less slack in the labour market. Third, average hourly earnings rose 2.8% y/y, the highest wage growth on this side of the crisis.”

“We think the higher wage growth and lower unemployment rate are sufficient ‘further evidence’ and make the Fed more confident hiking in December. Remember many FOMC members see the world through the Phillips curve and think that a tighter labour market leads to higher wage growth, which means higher underlying inflation pressure.”

“While the US election is a risk to our new Fed call, we do not think a Trump victory would change the Fed’s perception of the economy. We are likely to see a lower risk appetite in the very short run but, based on the Brexit experience, the financial markets will rebound before the FOMC meeting in December and we will not see a major impact on confidence indicators.”

“Markets have more or less priced in a Fed hike by year-end as much as possible (70% probability) given that there are still one and a half months before the December meeting. Markets have priced in approximately 1.5 hikes by year-end 2017.”