The much anticipated October payroll report was released on Friday and showed that employment indicators had rebounded from the prior two weak payroll reports. The 271,000 gain in payroll was the strongest of the year, and the unemployment rate fell to a seven-year low of 5.0%. I have written in the past that increasing wages would be a key indicator for the Federal Reserve (Fed) to start increasing rates. The 0.4% increase in average hourly earnings this past month resulted in the highest year-over-year increase in the past twelve months. This was a solid report and gives the Fed enough evidence to increase rates in December.
U.S. treasury bonds have been weak going into the report with yields up 20 basis points in the past week or so, and the sell off continued after the employment report. The market is pricing in a 70% chance of a Fed increase in December. I expect the front-end of the yield curve to be under pressure for the next several weeks as the market digests the data. Stocks coming off a terrific October had little reaction to the report, but if the rally in October was fueled by a dovish Fed and monetary accommodation, my opinion is that stocks will be weak, as the odds of an increase in interest rates rise.
Any weakness in equities will probably provide support to longer-maturity U.S. treasury bonds, so expect to see some curve flattening over the next few weeks if stocks come under pressure. The U.S. dollar strengthened on the report and commodities weakened. Keep an eye on these markets to see if global economic and market pressures increase in the weeks ahead. It was only two months ago that the market was very concerned about the U.S. dollar's strength.
I will be looking to see what some of the Fed governors say about the economy and the economic data this week to gauge how much market reaction we will get to the prospects of a December interest rate increase.
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