The first week of November was a packed week for scheduled data that included several central bank policy meetings as well as the US employment data release.
- Early in the week, essentially “no change” to rate policies was signaled by several major central banks, including the Bank of England, the Bank of Japan and the US Federal Reserve
- Unemployment data in the US showed a healthy rate of growth despite coming in slightly lower than expectations
- Overall, the economic and market based news points towards slow and steady improvement
Specifically for the Fed, policy makers left interest rates unchanged while reinforcing expectations for a hike at the December meeting
In their statement following the meeting on 3 November 2016, the Federal Open Market Committee (FOMC) concluded “that the case for an increase in the federal funds rate continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives”. Regarding their inflation objective, the Fed noted that the pace of price gains has “increased somewhat” and measures of inflation compensation “have moved up”.
The markets had low expectations that the Fed would hike in November ahead of the elections
As a result, Fed funds futures markets were little changed after the announcement, predicting a 78% probability of a hike in December. Combining statements from both the September and November meetings, where the Fed continued to express confidence in the labor market, the economy and improvement in inflation; most market participants have resolved that the Fed has provided a low hurdle to clear for a rate move in December.
Supporting the Fed’s confidence in the labor market, the US unemployment data published on Friday 4 November showed a healthy rate of growth despite coming in slightly lower than expectations. US non-farm payrolls rose by 161,000 jobs in October, versus 173,000 expected; previous months were revised higher by 44,000 jobs. For the year, the economy has added approximately 181,000 jobs per month.
Additionally, the unemployment rate dropped back below 5% to 4.875% unrounded
Average hourly earnings for private-sector workers, one of the main bright spots of the report, surprised with an increase of 0.4% for the month and a year-over-year increase of 2.8%. This annual increase represents the fastest rate of wage growth in seven years, indicates that economic growth is absorbing labor market slack and implies that employers are competing more to hire and retain their workers – all solid signals for the US economy.
Finally, another element of market uncertainty has passed as the mid-October US Securities and Exchange Commission (SEC) Money Market Reform implementation date triggered huge disruption in the front-end of the curve. Over USD 1 trillion of redemptions from prime money market funds moved to US government money market funds (MMF) to avoid the new market based net asset value (NAV), Variable NAV, and liquidity fees and redemption gates being required for institutional prime funds. The London inter-bank offered rate (LIBOR) had increased across the curve as issuers raised rates to attract non-MMF investors.
However, since implementation, the effects of MMF reform have faded
Markets have normalized, and focus has returned to the Fed, the economy and the US elections. Overall, the economic and market based news points towards slow and steady improvement, supportive of the gradual rate policy promoted by the Fed, and the wait-and-see guidance from several global central banks.
Exhibit 1: Annualised Libor Yields (shown as a percentage) have steadily increased from October 2015 through November 2016
Source: Bloomberg as of close-of-business 7 November 2016