US jobs surge triggers growing expectation of interest rate hike

Expectations are growing that US interest rates will increase next month, after the latest figures showed America’s jobs market roared into top gear last month, as hiring far surpassed Wall Street forecasts.

The Bureau of Labor Statistics reported the strongest rate of job creation thus far this year, as payrolls expanded by 271,000. The unemployment rate dropped to half the level it reached during the worst days of the recession.

“If the FOMC (Federal Open Market Committee) were meeting today they would be tightening,” said Jim O’Sullivan, economist at High Frequency Economics, referring to the Fed’s rate-setting committee.

“This is an unambiguously strong report.”

The jobless rate fell to 5 per cent, as the number of unemployed people fell by 1.1 million compared with this time last year. Wages rose at their strongest clip since 2009, with average hourly earnings rising 2.5 per cent over the year.

The figures triggered a sharp rise in bond yields, with the two-year Treasury yield jumping to a 5½-year high as traders priced in a Fed increase next month. The dollar also shot up, with the euro 1.4 per cent lower against the US currency at $1.0736 and sterling down 0.9 per cent at $1.5076.

Bond yields up

European bond yields were also higher, with 10-year bond interest rates up by around 0.1 per cent on average. Irish 10- year bonds were trading over 1.2 per cent and have increased from just over 1 per cent in the last few weeks.

October’s US job numbers were far above economists’ expectations of a 180,000 reading and are easily strong enough to reassure Fed policymakers that the US is approaching full employment. Job gains in August and September combined were revised up by 12,000.

The Fed has done what it can to prime global markets for the possibility of a rise in short- term interest rates next month – the first such increase in nine years. Fed chairwoman Janet Yellen has hung a central part of her case for higher rates on jobs market improvements.

While the Fed looks at a broad panorama of indicators when making its decisions, there is little doubt Friday’s report – and the next one in early December – are critical.

Peaked in 2009

The unemployment rate, which peaked at 10 per cent in 2009, is now only slightly above the 4.9 per cent level that Fed policymakers see as the longer-run normal level.

The figure means the pace of job growth in the past three months has averaged 187,000 per month, slower than the 210,000 pace in the first half of the year but still strong progress by any measure. Rob Carnell, an economist at ING, said it would now take a “catastrophically bad” jobs report for November for the Fed to sit on its hands on December 16th. – (Financial Times: additional reporting Irish Times business staff)