November Jobs Report
It may not seem so, but much can change with a single month’s jobs report. Well, not change necessarily, but perhaps confirm the path of Fed Policy. Maybe, depending on one’s understanding of Fed Policy.
Many people are convinced the Fed wants to raise rates, and is only waiting for the economic data to support it and therefore has been waiting for the economy to be strong enough to absorb higher rates. I don’t think that’s an accurate interpretation. Remember, the Fed has spent enormous energy the past six years to stabilize an economy devastated by the Financial Crisis. After stabilization came support. What the Fed now wants is to transition from stabilization and support to neutralization of monetary policy. This requires an economy able to stand on its own. If that requires low rates, it is okay with that. If it requires higher rates, it is okay with that. What it wants most to avoid is an economy unable to move from stabilization and support to self-sustaining growth.
Well, this morning’s report was very strong, with job growth of 321k, the most since January 2012. September and October were revised up 45k, for a net gain of 366k. The unemployment rate was unchanged at 5.8%. This caps off a very good year in job growth. However, it is not all sunshine, there is still a declining trend in labor force participation along with nearly flat wage growth.
Does this morning’s report now provide the evidence the Fed has been waiting for? Perhaps, but only if jobs are the single determinant of the Feds trajectory. It is not, inflation measures are another and also happen to be the 2nd part of the Fed’s mandate; jobs being the 1st. Well, inflation measures are currently running below the Fed’s stated benchmark of 2%, and current inflation inputs are falling, pointing towards further disinflationary pressure. This morning’s jobs report is strong and continues the improving trend but don’t expect the Fed to respond to every twist and turn in the data. They are primarily concerned with watching overall economic indicators as they consider the timing and pace of their next steps.
This mornings report has caused many forecastors to move forward the chances of increases in rates by the Fed to early 2015 form late 2015, and clearly the economys path may justify that. But I feel the risks remain similar to where they were yeterday with the Fed needing to see both of their mandates strengthening before they will tighten excessivly. Modest fed tightening will likely occur during 2015, but the risk of rapid rate hikes is low. It doesn’t want to lose ground by raising rates prematurely and choke off the recovery.
Markets, I think, agree and have responded with a flattening yield curve in fixed income securities and calm equity markets; indicating that markets feel the date of tightening has moved forward but inflation remains elusive allowing the Fed to continue to move cautiously. Expect shorter maturities to respond to the risks for Fed tightening and longer maturities to remain fairly anchored to inflation expectations while equities remain supported by both an improving economy and Fed support.