This week has just ended with the long-awaited US employment report, which is released on the first trading Friday of each month at 13:30 CET. In particular, the change in total non-farm payrolls, the unemployment rate and the average hourly earnings are the most important economic indicator of US economy.
While average hourly earnings increased 0.40% from September and the unemployment rate fell from 5.00% to 4.90%, the change in non-farm payrolls, which indicates the way unemployment will move, was slightly below market expectations and primarily driven by the private sector (with 142,000 jobs added out of a total of 161,000). But how did markets react to the report?
The Markets Love Good News
The S&P 500 had recently seen a very negative trend with eight consecutive down days (for the first time since October 2008, when it lost 198 points or 17%) from Oct 24 to Nov 03, demonstrating markets nervousness about US elections. Right after the release of the US employment report, instead, the S&P 500, the Dow Jones Industrial Average and the Nasdaq composite index started displaying bullish signals. Moreover, following the data, as expected, the dollar rose against most major pairs.
Most important is the fact that this week’s job report is the penultimate report before next Fed’s policy meeting in mid-November: higher wage growth, lower unemployment and robust employment data would make it difficult for the Federal Reserve does not raise interest rates this time. The US economy has proved to be strong enough to handle higher interest rates. Moreover, the rise in Average Hourly Earnings could potentially lead businesses to raise prices, boosting inflation and resulting in higher interest rates would make the economy slow and inflation decrease. But nonetheless, if we look at the bigger picture, in the context of the US elections, this report will not have a significant impact on the positioning of Fed hike expectations.
What A Trump Victory Means
Therefore, the probability of victory of the Republican nominee, Donald Trump, plays a key role in markets. Financial markets are beyond any doubt scared of a possible Trump’s success: because they do not know what his win would mean for them. It is no coincidence that the VIX index (which measures the implied volatility of S&P 500 index options and is an excellent indicator of market volatility) is not far from the post-Brexit high levels now.
In summary, the Federal Reserve would have all it needs to hike interest rates and the uncertainty about the upcoming elections can only delay the process, because, in truth, the institution is conscious that it needs to build up some interest rate ‘ammunition’ for facing the not so distant next US economy recession phase.
In particular, the US economy now seems to be in what is called a ‘mid-cycle expansion phase’: economic activity gathers momentum, profitability is healthy and the rate of growth positive. The last thing the Federal Reserve wants at the moment is to keep interest rates near zero (as it did for the last eight years) creating (and fuelling) potential bubbles in assets.