USD: NFP report supports Fed rate hike in December - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the release on Friday of the latest non-farm payrolls report had limited initial impact on the foreign exchange market dampened by heightened election uncertainty.

Key Quotes

“Nevertheless it was a solid report which revealed further evidence of a tighter labour market.

The tightening labour market is contributing to slower employment growth although it remains healthy having increased by 161k in October and 181k per month so far this year. In comparison employment growth averaged 219k per month in the same period of last year. There was also clearer evidence that the tightening labour market is resulting in higher wage growth. The annual rate of average hourly earnings growth accelerated to a new cyclical high of 2.8% in October which marks a clear pick up from the more subdued rate of closer to 2.0% which persisted following the global financial crisis between 2010 and 2014.

Fed Vice Chair Fischer has since acknowledged that recent US economic data has strengthened the case for resuming rate hikes as he believes the Fed is pretty close to meeting both parts of its mandate. He added to speculation as well that the Fed could allow the US economy to run a little hot stating that the economy could “to some extent exceed our employment and inflation targets”. Back in February he had stated that the Fed wants to see wage growth of 3% which is now close to being fulfilled.

Overall, a December rate hike appears close to a done deal if Hillary Clinton is elected President which would encourage a stronger US dollar heading into year end. Donald Trump becoming President is the main risk to a December rate.”