Fed to ‘keep at it’ after further jobs gains

Markets were presented with a somewhat mixed picture of the US labour market in October. Non-farm payrolls rose 261,000, higher than the 193,000 consensus, but another gradual easing from the respective gains of 292,000 and 315,000 in September and August. Also, the unemployment rate climbed from 3.5% to 3.7% despite the participation rate edging down to 62.2%. And hourly earnings advanced 0.4%, a step-up from the 0.3% seen over the previous two months.

In summary, there was something for both hawks and doves alike. On the one hand, further robust job gains and a pick-up in earnings growth suggests the labour market remains hot. But rising unemployment also adds to growing evidence of cooling conditions. Investors seem to have leant more on the latter judging from money markets. They are now marginally favouring a 50 basis point (bp) rate hike from the Federal Reserve (Fed) next month, rather than another 75 bp increase prior to today’s data.

Such a move would be consistent with the message communicated by the Fed this week. However, a step-down in the pace of rate rises is by no means a done deal. Hiring intentions remain excessively strong, with job openings climbing 437,000 in September to reverse around half of the sharp fall seen in August. Layoffs among companies also remain modest, with Challenger reporting that just 34,000 American workers were let go in October.

In this vein, the magnitude of the Fed’s rate hike in December will hinge on how the data unfolds over the coming weeks. Among the most important will be next week’s CPI figures, which will be examined for any signs of whether underlying inflation pressures are easing. But the key takeaway from the earnings season is that companies appear to still have pricing power, which suggests that the Fed’s job is not yet over and that it will have to keep at it raising rates.