Fed will raise rates in December – US jobs report review

Despite some slowdown from an impressive October, hiring remained solid in November after payroll gains decelerated sharply in August and September. This underlines that outside of manufacturing and mining the US economy is doing just fine. With Fed Chair Yellen's comments it is believed Fed will almost certainly hike rates on 16 December.

"We expect the Fed to raise the funds rate by 100 bp next year - somewhat more than the 60-65 bp currently priced into the bond market", says Nordea Bank.

A 211k gain in November payrolls brings the average monthly gain since June to 206k, close to the monthly pace of 213k in the first half of the year and still sufficient to be consistent with continued improvement in the labour market - a prerequisite for the Fed to start raising rates.

A 0.2% monthly gain in average hourly earnings in November following the strong 0.4% rise in October was enough to keep the year-to-date increase at a 2.8% annualised rate. This should keep the Fed confident that inflation will move back to 2%.

While the unemployment rate remained at 5% in November, just shy of the median FOMC estimate of the NAIRU, the broader U-6 unemployment rate rose 0.2% point to 9.9%. However, the unemployment rate is set to reach 4½% by end-2016 and the U-6 rate, which many including Fed Chair Yellen believe is a better measure of overall labour market slack, to reach around 9%, consistent with roughly full employment.

Against this background and with Yellen's comments this week that she regarded domestic economic conditions as sufficiently strong to start raising interest rates, the probability that we will see lift-off in just under two weeks seems very high.

Going forward, economic data will set the tone for the Fed's tightening pace during 2016. Given Fed officials' recent estimates of how many jobs are needed to keep unemployment steady, ranging from 70k to 150k, anything stronger than a 150k rise in payrolls should boost the chance of more Fed rate hikes. Yellen said yesterday that the economy needs to add less than 100k jobs per month to absorb new entrants into the labour force.

"We continue to expect wage growth to accelerate to around a 3% annualised pace over the coming year or so, see US Phillips curve alive - and soon kicking? Against this background, we remain of the view that rising inflation pressures will force the Fed to raise rates faster in 2016 than markets currently expect. Thus, we expect the Fed to raise the funds rate by 100 bp next year - somewhat more than the 60-65 bp currently priced into the bond market", added Nordea Bank.