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Jobs Report May Have Cinched Fed’s Rate Raise

8 December 2015 in Trading Ideas

Few things in financial markets are a slam dunk, but a general consensus has emerged that last Friday’s employment report was the last nail in the coffin for the Federal Reserve’s zero-percent short-term interest rates.

In addition to announcing 211,000 new hires last month — a bit more than Wall Street had expected — the Labor Department on Friday also revised upward its earlier estimate of job creation in September and October by a total of 26,000 jobs. The unemployment rate was unchanged at 5%.1

“This is a green light [to raise rates] from our perspective,” Phil Orlando, chief equity strategist at Federated Investors, told the New York Times.

Investors, who the Times said has previously shunned stocks after strong jobs data and the prospect of higher interest rates, greeted the report with enthusiasm, perhaps because it removes any remaining uncertainty about the Fed’s plans.

Stocks reversed Thursday’s losses and rose more than 2% on Friday alone. Bond yields fell slightly, but the trend overall for interest rates has been up, as investors have likely anticipated the Fed’s decision. The 10-year Treasury note yield was at 2.28% on Friday – slightly off its high of 2015, but well above the near-term February low of under 1.7%.

Other investments tied to rising interest rates have outperformed recently. The Rising Interest Rates motif, for example, has gained 5.1% in the past month. In that same time, the S&P 500 has fallen 0.4%.

In the last 12 months, the motif has increased 17.6%; the S&P 500 is up 0.8%.

Friday’s employment report echoes other recent positive data on job openings, new weekly claims for unemployment benefits and private payroll surveys, Orlando noted to the Times. “This is a good number for liftoff,” he said, referring to the expected move by the central bank, which has held rates near zero since December 2008.

Indeed, the Times said that many analysts expect the Fed to raise rates roughly every other meeting next year, which would bring the Fed’s benchmark rate to about 1% in the fall of 2016.

The Fed has certainly been hinting that it doesn’t need much more convincing to raise rates. Federal Reserve Chairwoman Janet Yellen said last week – before Friday’s jobs data — that economic conditions were ripe for the central bank to start raising its benchmark interest rate this month.2

“I think the economy is on the road to recovery,” Yellen said. “We’re doing well.”

Of course, Yellen also seemed intent on conveying caution, insisting the Fed’s policy-making committee would not make a final decision until its meeting Dec. 15 and 16. She said raising rates would be “a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession.”

The Fed painted a similar picture in greater detail in its latest beige book report, a compendium of economic reports from the 12 regional reserve banks also released last week. It reported that economic activity “increased at a modest pace” across most of the country. It also noted increased wage pressures, particularly for skilled workers in fields like nursing and software development.

Yellen also said that some drags on the economy had subsided, the Times said. The risks from foreign economic events have diminished, and Yellen said she expected that government spending would contribute to growth in the coming years. That is a significant change from the post-crisis period, noted the Times, when a combination of spending cuts and battles over fiscal policy weighed on the economic recovery.

Still, Fed-watcher Jon Hilsenrath noted for the Wall Street Journal that the Fed’s vote will also involve a parallel strategy: Fed officials are likely to go into the meeting debating how they can emphasize to the public that it will proceed cautiously and gradually with subsequent rate increases in 2016.3

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1 Nelson D. Schwartz, “Robust Jobs Report All but Guarantees Fed Will Raise Rates,” nytimes.com, Dec. 4, 2015, http://www.nytimes.com/2015/12/05/business/economy/jobs-report-hiring-unemployment-november.html?_r=0, (accessed Dec. 6, 2015).
2 Binyamin Applebaum, “Janet Yellen Says Economy Is Ripe for Federal Rate Increase,” nytimes.com, Dec. 2, 2015, http://www.nytimes.com/2015/12/03/business/economy/janet-yellen-federal-reserve-interest-rates.html, (accessed Dec. 6, 2015).
3 Jon Hilsenrath, “Hilsenrath Analysis: Jobs Report Clears the Way for Fed Rate Increase,” wsj.com, Dec. 4, 2015.

  1. Fidia
    9 Dec at 10:24 am

    I hate to say it but a giant false flag (OPERATION GLADIO) will have to come out very soon in order to keep cover and divert attention from the truth. I do not see any other options left, the reality MUST remain hidden or attention diverted, …or the unravelling comes.
    It’s actually quite easy to understand if you see what they did was “only a test” … Do you understand what I mean when I say a “test”?

    http://www.collapse.news/2015-08-21-chinas-unfolding-market-crash-resembles-1929s-black-thursday-plunging-world-economy-into-depression.html

    let’s assume this is reality, the Fed really wants to hike rates (they do not “want to”, they HAVE to). For the sake of saving face and retaining any credibility they absolutely MUST raise interest rates after seven years.
    Just a .25% rate raise in rates will require the equivalent of up to $800 billion of collateral necessitated to being pulled. Did you get that? $800 billion??? A huge number and enough to tank the whole system …unless someone is willing to replace it.
    So where does this leave the Fed and their quarter point rate increase? I would say they have already seen the future and … IT WAS THURSDAY! If they decide to hike rates and the EU does not pick up the collateral slack, I believe we will not see the markets stay open for more than a week or so. I say this because in essence the Fed will be issuing a margin call into a system already lacking for liquidity. As I’ve said before, they originally treated a “solvency” problem with more liquidity and it has now morphed into a far bigger solvency problem. Only this time as liquidity is also lacking, they do not have the tools (collateral) to create the needed additional liquidity.

    The Fed has truly painted themselves into a corner of their own making. I am shocked they have been so vocal and vehement they were going to raise rates. Did they not have a deal already in place with the ECB or were they double crossed? On the one hand if they do not hike rates, their credibility is toast. On the other hand if they do raise rates they will smoke the financial markets faster than you can call your broker with a sell order. I can only think the Fed somehow believed they had a deal with the ECB? Even the BIS has warned the Fed about raising rates, is the Fed just not listening to the rest of the world? Whether they see it or not, they have created a currency crisis with the dollar being the central character.

    Reply
    • andre holguin
      14 Jan at 12:04 am

      thankyou fidia! for this information. 🙂

      Reply
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