US Dollar Uptrend Reignited as October Jobs Report Greenlights December Rate Hike
Ahead of the release of the October US job report expectations were high that a strong figure would be delivered, but the real number surpassed the most generous predictions.
The number is in and the US recorded 271,000 new nonfarm payroll jobs in October. In addition to this increase, revised job report numbers for the two previous months show 12,000 more jobs were created. Average hourly earnings increased by US 0.09, a 0.4% rise in October, exceeding the expectations of 0.2%.
The unemployment rate, the lowest since April 2008, is at 5.0%. For many Federal Reserve officials, this rate denotes full employment.
Another great nugget for the American economy from this job report is the spread of employment gains in October. There was healthy job creation in all sectors except in mining, where 4,000 jobs were lost and in manufacturing, where no new jobs were created.
Notably, construction payrolls rose by 31,000, the largest increase since February of this year. There were large gains in retail, health and leisure, totalling to 241,000 jobs added to entire services sector. Government added 3,000 jobs.
It should be noted that the strong US dollar may have had a strong impact on the manufacturing industry. Manufacturing companies have been forced to find ways to reduce expenditure and cut spending; and energy and mining companies have cut back on exploration endeavours and drilling due to low global oil prices. These rollback measures offer some insight into the dismal job numbers for these industries in October.
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The year-on-year reading upped to 2.5% due to rising wages. An increase not seen since July 2009 and spurring confidence that US inflation can and will move towards the Federal Reserve’s 2% target.
With such strong numbers, expectations of a US hike in interest rate is an almost certain invent at the end of year. Adding to this certainty is the minutes from the Federal Reserve’s October meeting, which include a rate hike agenda in the bank’s December policy meeting.
"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," says Michael Gapen, analyst with Barclays in New York.
Barclays now forecast a federal funds range of 25-50bp in December, up from the current 0-25bp.
Prior to the report, Fed Funds futures were pricing in a 58% chance of a rate hike, this has since risen to 72% offering the Federal Open Market Committee the perfect opportunity to raise rates with minimal disruption.
Understandably, the USD has surged against its rivals after the release of the October jobs report.
"The US economy has just turned off gravity for the Dollar. Such a stellar rate of job creation has sent the Greenback into orbit," says David Lamb, head of dealing at the forex specialists FEXCO.
"With America's jobless rate tumbling to its lowest level since April 2008 - and the economy adding jobs at a truly breathtaking rate - any doubts about its strength can be cast aside argues Lamb.
"With a December rate hike now seemingly a done deal, huge inflows into the Dollar should drive it even higher in the coming weeks."
