We just had the jobs report of the year, exceeding all estimates in a Bloomberg survey of economists. The blockbuster edition of U.S. nonfarm payrolls left some on Wall Street feeling even more confident that the Federal Reserve’s tightening phase would start in December, and sent others scrambling to bring forward their calls for liftoff.
Here’s a wrapup of who is and isn’t changing their call on Friday.
Barclays economists Michael Gapen and Rob Martin move their call to December from March:
The October payroll report was very solid and exhibited broad-based strength. It suggests that labor markets have fully rebounded after slowing in August and September. When we moved our rate hike assumption to March 2016, we assumed that the volatility in financial markets would be longer lasting and the Fed would have trouble resolving their differences about the viability of rate hikes before year-end. The October FOMC statement and Chair Yellen’s testimony to Congress were more hawkish than expected, suggesting the committee saw downside risks from global developments as having diminished and activity pointing to a “live possibility” of a rate hike in December.
BNP Paribas’s U.S. economics team shifts to December from March:
The upside surprise in nonfarm payrolls gave a clear signal that the disappointing August-September employment gains were likely just a blip. We think this significantly increases the odds of a December rate hike and have shifted our expectations for the timing of liftoff to December (previously March).
TD Securities Head of Global Macro Strategy David Tulk and Deputy Chief U.S. Macro Strategist Millan Mulraine also moved their call from March to December:
On the whole, this is a very impressive report and it checks all the boxes that the Fed will need to feel comfortable about raising rates in December. In conjunction with fading [emerging-market] growth fears and a sufficient amount of momentum in the domestic economy reflected in this report and other data, there is a higher likelihood that underlying inflation will return to the 2 percent objective over the medium term. As a result, we have pulled forward our call for the first hike to the December meeting.
UBS Deputy Chief U.S. Economist Drew Matus reiterates that it’s time to cancel any Dec. 16 vacation plans, as he sticks with his call:
Although there is still some time (and much data) to go before the December meeting, this report raises the odds of a move by the Fed at that FOMC meeting, in line with our outlook. Wages are accelerating, unemployment is falling and, in all likelihood, headline inflation should pop higher as base effects push the overall rate of inflation higher.
Goldman Sachs is also sticking with December:
The October employment report was solidly better than expected, and we now see a rate increase from the FOMC at the December meeting as very likely.
RBC Capital Markets Senior U.S. Economist Jacob Oubina has increased confidence that liftoff is coming in December:
The bottom line for me is that in an environment where the Fed is now promoting slower job growth as the cyclical norm (i.e., NFPs in the low 100,000 zone are “good enough”), prints in the mid-200,000 vicinity help them to pitch a December rate hike (our base case) even more convincingly. After this stellar payroll report December seems as close to a lock as you are going to get. In addition to that, the uptick in y/y average hourly earnings is really going to diminish the doves’ argument that slack remains in the labor backdrop.
Société Générale Chief U.S. Economist Aneta Markowska and Senior U.S. Economist Brian Jones think liftoff in December is a done deal:
Prior to today’s employment report, we viewed the probability of a December liftoff as essentially a coin toss. Following an even-stronger report than our above-consensus forecasts, the probability has moved substantially higher and we now peg it at 70 percent. The 271,000 gain in payrolls in October has entirely reversed the recent soft patch, erasing any concerns about an underlying slowdown in the pace of hiring. More importantly, the acceleration in wage growth to a new cyclical high suggests that the Phillips curve is beginning to reassert itself after being dormant for a number of years.
Mizuho economist Steven Ricchiuto, however, is sticking to his call for a hike in the second quarter of next year:
Risks of waiting for the first rate hike are much smaller than the risks of moving too soon.
Deutsche Bank Chief U.S. Economist Joe LaVorgna also maintains that we won’t see a rate rise until March:
It’s a really strong jobs report, but I’ve learned over the years that reacting to the number isn’t prudent and what matters is the totality of data. To me there is a lot of time left and I’m not convinced the next batch of data will be good enough or that the financial markets will make the Fed confident enough to move next month. … If the meeting was tomorrow, I’d say they were going, but since it’s in December, I don’t want to say they are for sure going this year.
Macquarie North America Analyst David Doyle says his call for a December hike has been bolstered:
The report strongly supports the case for December liftoff, which has been our base case since August... The most expansive measure of labour slack fell to a new cycle low of 9.8% (prev. 10.0%). This continues to recede at more than twice the pace of the headline measure of unemployment, having now fallen 1.7 percentage points in the last 12 months. If its current trend continues, it is likely to reach 9.6% by December, the same level it was when the Fed first hiked in June 2004.
Bank of Montreal Chief Economist Douglas Porter is also more convinced that a Yuletide hike is in the cards:
Thankfully, today’s rock-solid U.S. jobs report has all but sealed the deal, especially in the wake of October’s strong financial market bounceback and recent not-bad economic outcomes in the global economy (i.e., China). The employment report was as close to a no-doubter as they come, replete with an impressive headline reading (+271,000), net upward revisions to prior months, a dip in the jobless rate (to 5.0%), solid earnings (+0.4%, and 2.5% y/y, the best in six years), and solid hours worked (+0.3%). Any questions?...We are now more comfortable than ever calling for a Fed rate hike in December, with a follow-up move not much further down the line. Above and beyond the strong jobs data, U.S. spending and housing remain robust, and financial markets are healthy, leaving low inflation as the only possible justification for holding steady.
Citigroup Economist Peter Dantonio said their economists are continuing to forecast that liftoff will occur in March:
October employment gains of 271 thousand and an apparent pick up in wage growth—what a great employment report. It would take a "bunker-buster" offset to deter the FOMC from raising rates in December, in our view. This sounds like September all over again. And all it took then was the markets to react badly to events in China (so said Chair Yellen). Were they not apparently so fickle, we would change our Fed call right now to a December hike. But the recent actions of the FOMC imply it is possible sentiment may switch even from current lofty levels of near-certainty about December.
Scotiabank Chief Economist Derek Holt said the report has paved the way for raising rates in December, in line with his projection:
The three month nonfarm payroll average is 181k (+12k were added on net to Sept. and Aug. via revisions), not the highest number seen in recent years, but easily strong enough to meet the Fed’s criteria for an improving labor market and thus raising the Fed Funds rate in December. Coupled with already observed readings on inflation and GDP, and barring a major revision to domestic economic data to the downside or a major international economic crisis materializing in the next month, today’s nonfarm number means that the odds have to favor a Fed hike in December.
Meanwhile, market-based probability of the first hike coming in December has moved sharply higher in the past week, with much of the rise coming after the meeting.