The October jobs report kept the Federal Reserve (Fed) on track to raise rates in December, as the U.S. economy created 161,000 net new jobs, the unemployment rate fell to 4.9%, and average hourly earnings -- a key gauge of wage pressures -- accelerated to 2.8% year-over-year from 2.7% in September. Although the headline job number was slightly below expectations (173,000), the September reading was revised up a significant 35,000. Since mid-2016, job creation has slowed to 175,000 jobs per month and could continue to slow further during 2017. The recent job growth trend is right in line with the expected 175,000 jobs created in November and we anticipate a number in line with consensus. If there are any surprises, it could come from how quickly wage growth accelerates, as wage inflation may approach 3.0% by the end of 2016, up from a low of 1.5% in 2012. This is still nowhere close to the pre-Great Recession pace of 4-4.5%, but further acceleration in that direction in coming months could still catch the market, and maybe even the Fed, off guard. On balance, the labor market continues to tighten and push up wages, keeping the Fed on track to hike rates later this month and potentially twice in 2017.
DECEMBER 4
ELECTIONS IN AUSTRIA AND CONSTITUTIONAL RERFERENDUM IN ITALY
On the surface, both of the votes are very different. But they each represent opportunities for their respective citizens to indirectly express their view on European integration, continued membership in the European Union, and use of the euro as a common currency. Currently more Eurosceptic factions lead the polling in both countries.
DECEMBER 8
EUROPEAN CENTRAL BANK (ECB) MEETING
The European Central Bank’s (ECB) current policy of quantitative easing (QE) -- bond buying to keep interest rates low -- will expire in March 2017. The ECB is unlikely to end the program abruptly. More likely, it will announce further measures of support, though probably on a schedule that diminishes QE over time, similar to the Fed’s “tapering” policy that began in 2013 [Figure 1].
DECEMBER 13-14
FEDERAL RESERVE (FED) MEETING
The Fed’s policymaking arm, the Federal Open Market Committee (FOMC), will hold its eighth and final policy meeting of 2016 on December 13-14, 2016. Barring a sharp downturn in the economic data or an unusual rise in geopolitical risk in the coming weeks, we expect -- and the market has fully priced in -- that the Fed will raise its target range for the federal funds rate by 25 basis points at the meeting. The hike would be the second of this cycle; the first came a year ago, in December 2015. At the December meeting the Fed will also release a new set of economic projections and more importantly, publish a new set of rate path projections (the “dot plots”) for 2017, 2018, 2019, and the “longer run.” Fed Chair Janet Yellen will also hold her fourth and final press conference of 2016 following the meeting. At the September 2016 meeting, the “dot plots” suggested that the FOMC planned to hike rates by 50 basis points in 2017 if its forecasts for the labor market and inflation were met. We concur with the Fed’s view for 2017, and in our view three 25 basis point Fed rates hikes are more likely than just one in 2017. Currently, the market has priced in just one 25 basis point hike in 2017.