Macro Weekly
Group Economics
06 November 2015
Will the Fed walk the talk?
After a strong job report, the Fed is likely to raise rates in December
Macro & Financial Markets Research
Germany’s industrial sector is going through tough times …
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…but the outlook for the eurozone economy remains one of
Maritza Cabezas & Aline Schuiling
maritza.cabezas@nl.abnamro.com aline.schuiling@nl.abnamro.com
ongoing recovery Just a few weeks ago, the Fed had been delivering mixed messages about the possibilities of a rate hike. The statement of the October meeting, however, introduced more hawkish language, increasing the probability of a December rate hike. We think that October’s job report has made a liftoff in December more likely. Although our base case was a rate hike in 2016, we think that the direction of the labour market is now undoubtedly a strong one, enough to get inflation back to the 2% target at a faster pace. October’s US job report strong from many sides The October job report shows that the US economy is shrugging off the impact of the earlier financial stress. Nonfarm payrolls increased by 271K in October after a downwardly revised 137K the previous month, while August was revised up by 17K. This increase in nonfarm payrolls was much higher than the consensus forecast of 185K. The unemployment rate edged down to 5% from 5.1% the previous months. Average hourly earnings, increased by 0.4% mom, after being flat in September. Part time employed workers looking for a full time job also improved to 9.8%, the lowest since 2008. The participation rate, however, has remained unchanged since August, at 62.4%. The participation rate matters, but we think that it’s just a question of time before the labour market attracts more entrants. Finally, from a sector perspective hiring in the manufacturing sector remains soft, with no job gains in October. What is the Fed looking for in the labour market? One of the requirements for a rate hike this year is that “the labour market improves further” as mentioned in the last FOMC statement. October’s and November’s labour market reports play a critical role in this decision. But that is not all. Chair Yellen, since the beginning of her mandate, has relied on a broader range of indicators to determine the slack of the job market. There is not much concern about the nonfarm payrolls and unemployment rate. Both have been pointing to a tighter labour market in the past year. Meanwhile, indicators that measure the flows in the labour market, such as the quits and the hiring rates, have shown a moderate growth pattern. And
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